This Firm Has No Competition

 | Jul 18, 2014 | 8:24 AM EDT  | Comments
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Why did Snap-on (SNA), the ancient tool workhorse, rally four points to an all-time high in yesterday's hideous session? What makes a stock totally buck the entire market and end up positive when so many others that reported good quarters just gave up the ghost?

Was it the 20% increase in second-quarter earnings? Maybe the 8.4% increase in sales? Or the 70 basis point improvement in operating margin? The twelve cent "beat" on a $1.68 basis? The recent 16% increase in the dividend, one that's been paid without interruption since 1939?

No. It was because of the competition. Or, more importantly, the lack of it.

We don't spend enough time talking about mundane stocks that just consistently deliver like Snap-on -- which is up 90% over the last two years and 30% over the last year – did yesterday.

In fact, looking at stocks that could buck the powerful negative trend of the market is often a great way to figure out what the market really wants, without any help from hostile bidders or big upgrades.

What Snap-on has is a unique set of diagnostic and operating tools that are upgraded constantly, whether they are for cars, trucks, aviation, agriculture or even military, mining and technical education. The complexity of everything requires sophisticated diagnostic tools to fix -- there are now thousands of parts in a car compared with hundreds just a couple of decades ago -- and only Snap-on, a 96-year-old company, seems to have been able to keep up with the times. I am sure you have seen its 3500 mobile vans as they travel to the 300,000 vehicle repair shops in the U.S. alone.

But when I talked with CEO and chairman Nick Pinchuk about the quarter yesterday, what stood out was a conversation he had had with customers -- all the good ones love talking with customers -- recently at a drag race. He likes to talk about what the other guys are up to, the companies that he competes against. What stood out was that the clients didn't even seem to know! They didn't think there was any competition; in many cases, for many individual products, there simply isn't any. There's no one to turn to. You have to use Snap-on.

Which got me to thinking. How many companies HAVE to use one company's product? Can you imagine if there were only one supplier of tools to hospitals? How about if there were only one supplier of business equipment to financial companies? Or one supplier of oil gear?

The uniqueness is what makes Snap-on great and what makes it a terrific stock. Of course, with the greatness comes a tremendous amount of humility. These guys don't pound their chest about their stock. They pound it about their product. They don't tell the customer "here's what you need." They listen to the customer and make what the customer wants. That same tool might then be sold to others who have the same need, but didn't know there was a tool or a diagnostic test out there that could help. It's almost as if Snap-on is like the doctor who is constantly inventing cures and preventatives and then sells those cures and preventatives to others who need them.

And that's the secret.

In Get Rich Carefully I wrote that one of the best things about winning companies is that they are often stealth technology stocks. If Snap-on simply sold wrenches and sockets to the masses it would be up against dozens of companies including many companies in countries with inexpensive labor and unfair trade practices that would crush them.

But when you make create proprietary technology and you give the salespeople what they need in the field to make their franchises strong and unassailable, you do well. That's Snap-on.

Many companies have reported terrific quarters this season. The one that stands out the most is Snap-on, the one with no competition.

That's the secret ingredient worth looking for in a dog-eat-dog world where there's always someone trying to steal your customers.

No one's trying to steal Snap-on's customers, not because the customers are per se loyal to Snap-on but because no one's in its league.

That's a moat that's not going to be breached any time soon. It's almost a guarantee of terrific earnings for years to come.

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