SWK - Techtronic Industries: Positives Are In The Price

2023-08-04 12:32:04 ET

Summary

• Techtronic Industries Company Limited's 1H 2023 financial results are expected to be strong, based on a review of its peers' recent financial performance.
• However, positives have already been factored into Techtronic's valuations, as the stock trades at a rich PEG ratio of 1.3 times.
• My Hold rating for Techtronic Industries stays unchanged, as I consider both its peers' above-expectations results and Techtronic Industries Company Limited's current valuations.

Elevator Pitch

My investment rating for Techtronic Industries Company Limited's ( TTNDY ) [669:HK] shares remains as a Hold.

Previously, I wrote about The Home Depot's ( HD ) below-expectations first quarter results and encouraging U.S. residential property market metrics which had "mixed read-throughs" for Techtronic Industries as detailed in my May 25, 2023 article .

For the current update, I highlight insights from the recent financial disclosures and management commentary for TTNDY's key peers such as Makita Corporation ( MKTAY , MKEWF ) [6586:JP] and Stanley Black & Decker, Inc. ( SWK ). I also review Techtronic Industries' recent share price performance and its current valuations.

TTNDY's financial performance for the first half of 2023 should have been pretty decent, judging by its peers' results and management comments. But these positives are already in Techtronic Industries' share price, which means that a Hold rating for the stock is appropriate.

Do note that Techtronic Industries' stock is listed in Hong Kong and on the OTC (Over-The-Counter) market. The company's OTC shares with the TTNDY ticker have decent trading liquidity, as evidenced by its three-month average daily trading value in excess of $3 million. Readers also have the choice of trading in Techtronic Industries' relatively more liquid shares listed on the Hong Kong Stock Exchange with the 669:HK ticker (three-month mean daily trading value of $60 million) using brokerages with international markets access like Interactive Brokers.

Key Peers' Recent Financial Performance

Techtronic Industries' key peers have performed pretty well in the second quarter of calendar year 2023, and this suggests that the company's 1H 2023 results (expected announcement date is August 9, 2023 ) could be reasonably strong.

Makita Corporation's most recent quarterly financial results came in above the sell-side's expectations. Based on consensus data obtained from S&P Capital IQ , Makita's actual Q1 FY 2024 (YE March 31) top line and EBIT were +4% and +106% above the analysts' consensus financial estimates, respectively. Specifically, EBIT for Makita jumped significantly from JPY2.2 billion for Q4 FY 2023 to JPY16.3 billion in Q1 FY 2024.

Makita also left the company's full-year fiscal 2024 (April 1, 2023 to March 31, 2024) financial guidance unchanged when it reported its Q1 FY 2024 earnings. This means that Makita continues to expect a substantial +95% recovery in its operating income for the new fiscal year. In other words, the worst could be already be over for power tool manufacturers such as Makita and Techtronic Industries.

In the management commentary accompanying its quarterly earnings announcement , Makita Corporation noted its observations that "the increases in energy and raw material prices began to subside" in Europe. Europe is Techtronic Industries' second largest geographic market representing 15% of the company's sales last year, so an improvement in Europe's operating environment will be positive for TTNDY.

Separately, there were favorable takeaways from Stanley Black & Decker's comments at the company's recent Q2 2023 results call on August 1, as it relates to Techtronic Industries' prospects.

SWK mentioned at its second quarter earnings briefing that demand was still "solid for the professional side of the market which represents roughly 70% of our Tools business" in Q2 2023, and guided that there is "the potential for stronger professional demand in the back half." Healthy demand for power tools from professionals will be positive for Techtronic Industries. TTNDY's "MILWAUKEE (brand) is now the number 1 brand of professional industrial-grade cordless products in the world" and contributed more than 60% of the company's revenue last year as indicated at its FY 2022 earnings call in March this year.

Stanley Black & Decker's Q2 2023 financial performance was good, and the positive momentum seemed to have continued into July. SWK's YoY top line contraction narrowed from -11.6% Q1 2023 to -5.3% in Q2 2023, and the company's actual second quarter revenue beat market expectations by +0.6% . More significantly, Stanley Black & Decker disclosed at its Q2 earnings call that "July has been a good start to the quarter (Q3 2023)" based on "trends in POS (Point-Of-Sales)".

Share Price And Valuations

Techtronic Industries' recent stock price performance and its current valuations imply that positives relating to bullish expectations about its 1H 2023 results have been priced in to a large extent.

TTNDY has rebounded substantially by +37% from its 2023 year-to-date share price trough of $45.42 as of June 6, 2023 to close at $62.17 at the end of the August 3, 2023 trading day.

As per S&P Capital IQ's valuation data, the market is now valuing Techtronic Industries at 19.4 times consensus forward next twelve months' normalized P/E. As a comparison, TTNDY's consensus FY 2022-2025 normalized EPS CAGR is relatively lower at 14.8%.

This means that the current PEG or Price/Earnings-To-Growth ratio for Techtronic Industries is quite demanding at 1.3 times. Stocks are usually deemed to be fairly valued at a PEG multiple of 1 times.

Bottom Line

There are indicators (from peers' results) that point to a strong set of 1H 2023 results for Techtronic Industries. However, positives have already been factored into TTNDY's stock price and valuations. In that respect, I continue to rate Techtronic Industries Company Limited stock as a Hold.

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