Snap-On (SNA)

It pays to do fundamental research. This bearish trade was recommended in the JaguarLive chat room on Oct. 15 with the stock trading at $169. Just 4 days later on Oct. 19, the stock closed at $151 (+10% move)! To learn more about our approach and how you can become a successful trader, sign up for a 4-week trial and test drive the JaguarLive chat room: SUBSCRIBE

Oct 15

Snap-On (SNA) –  The industrial machinery and equipment maker, particularly tools and diagnostic equipment. We are seeing unusual put buying picking up here, small action but in a name that never appears on the radar.

– Buyer of 200 October 165 puts for $2.95 offer
– Buyer of 165 March 165 puts for $9.30 offer

Earnings on October 18 before market opens. The company’s business is highly correlated to auto repair cycles and on larger scale global PMIs which we know have softened sharply internationally but remain firmly strong in the US. Company has three main businesses and here are YoY growth trends of last 4 quarters (2Q18, 1Q18, 4Q17, 3Q17):

Commercial & Industrial: +4.4%, +1.9%, +10.1%, +0.2%

Snap-On Tools: -1.5%, -2.7%, -3.0%, -1.6%

Repair Systems & Information: 0%, +2.6%, +6.2%, +8.2%

Total Organic Growth: +1.3%, +0.8%, +4.3%, +2.3%

Commercial is doing okay though with weak real estate macro trends question becomes whether it will slow from here. Tools have been negative for 4th consecutive quarters and likely driven by shift of sales to online channels such as Amazon even though company repeatedly denies this. Repairs growth have been slowing in every quarter and last reading was flat at 0%.

Margin Contraction Ahead? – The next question is margins because so far every industrial stock that has reported earnings (TSE, FAST, etc) have been killed on margins guidance. Last quarter in earnings call on July 16 the CEO downplayed this threat despite tariffs on steel and aluminum:

“We have the ability to move things around the resource. So when we look at the list of tariffs, we think we’re pretty well positioned. we were not ringing our hands and worrying about them effectively. So, I think now things could change and things would be changing minute by minute with tariffs.”

However, SNA among with other industrials presented in RBC Global Industrial Conference on September 6 in which big takeaway was price/cost spreads and trade wars are still being cited as the primary risk overhang that could derail the current economic upswing.