The auto industry is Snap-on's largest end market. Snap-on pioneered mobile tool distribution in the automotive repair market. Two of Snap-on's business segments focus on the automotive market: Snap-on Tools Group and Repair Systems & Information Group. These two segments represent 41% and 29% of sales. So 70% of Snap-on's sales are related to auto repair and manufacturing, putting Snap-on in a great position to benefit from the strength in auto industry. Vehicle sales are strong, and trending higher. July seasonally adjusted vehicle sales of 17.6M units was higher than consensus of 17.2M.
Snap-on has successfully diversified into markets adjacent the autos. The Commercial & Industrial Group contributes 30% of Snap-on's revenue. Included in this segment are two industrial markets also benefiting from positive secular tailwinds: aerospace and construction. Aerospace is strong as a result of the shift toward airplanes with higher fuel efficiency. Construction is gradually strengthening after years of low investment following the financial crisis. I believe these industries will maintain relative strength due to positive secular trends.
Snap-on's manufacturing costs decrease with lower commodity prices, particularly steel and natural gas. The principle raw material used to manufacture Snap-on's products is steel. Assuming steel is 10% of COGS, then a 10% drop in the price would increase net margin by 69 bps (tax rate 31.5%).
Snap-on has a financing division, Snap-on Credit, which makes loans to franchisee-distributors. When I value Snap-on, I eliminate the results of the Snap-on Credit segment. I view Snap-on's credit business as a subsidy to its manufacturing business. I am not buying Snap-on for credit exposure. I don't think the credit segment has delinquency problems, so I am not assigning it a negative value.
In Summary, Snap-on has exposure to the strong end-markets of autos, aerospace & construction. Snap-on is a beneficiary of lower commodity prices, particularly steel, and has low exposure to a weakening China. On the negative side, Snap-on does have some negative exposure to the stronger USD. I am avoiding investments with high foreign exchange exposure. Although I am not happy with the USD exposure, all considered, Snap-on is still an attractive industrial stock.