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Growth & Income

Snap-on Incorporated (SNA - Analyst Report) recently delivered solid fourth quarter results, prompting analysts to revise their estimates higher for both 2012 and 2013.

This sent the stock to a Zacks #2 Rank (Buy).

Analysts project solid double-digit earnings growth over the next few years, which, along with a 2.2% dividend yield and reasonable valuation, offer attractive upside potential.

Company Description

Snap-on is a global provider of professional tools, equipment, and related solutions for technicians, vehicle service centers, original equipment manufacturers and other industrial users.

It primarily operates in 3 business segments:

Commercial & Industrial Group (35% of sales)
Snap-on Tools Group (36%)
Repair Systems & Information Group (29%)

The company was founded in 1920 and is based in Kenosha, Wisconsin. It has a market cap of $3.6 billion.

Fourth Quarter Results

Snap-on reported better than expected results for the fourth quarter on February 2. Earnings per share came in at $1.27, beating the Zacks Consensus Estimate of $1.17. It was a 28% increase over the same quarter in 2010.

Sales rose 6% to $736.6 million, driven by growth in all three segments. The Snap-on Tools Group led the way with 9% top-line growth.

Gross profit declined slightly as a percentage of net sales, from 45.7% to 45.6%. But this was more than offset by a decline in operating expenses as a percentage of net sales, from 33.1% to 31.5%.

These factors led to a stellar 19% increase in adjusted operating income.

Outlook

Following solid Q4 results, analysts revised their estimates higher for both 2012 and 2013, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2012 is now $4.99, representing 10% growth over 2011 EPS. The 2013 consensus estimate is currently $5.52, corresponding with 11% growth.

Analysts expect solid end-market demand for auto repair tools, expansion into new industries and expansion into the emerging markets of China and India, along with margin expansion, to drive strong double-digit EPS growth over the next few years.

Dividend

In addition to double-digit EPS growth, Snap-on pays a dividend that yields 2.2%. It has a history of slowly and steadily raising its dividend:

SNA: Snap-on Incorporated

Valuation

Valuation looks very reasonable with shares trading at just 12x forward earnings, in-line with the industry, but well below its 10-year median of 15x.

And its price to book ratio of 2.3 is below the peer group multiple of 2.8 despite above-average returns on equity.

The Bottom Line

With rising estimates, strong growth opportunities, a solid 2.2% yield and reasonable valuation, Snap-on offers attractive total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.