2023-03-08 05:11:23 ET
Summary
- Tennant Company posted some strong sales, profit, and cash flow results recently.
- The firm expects continued growth through 2023, which should make shares a bit cheaper.
- TNC stock looks fairly valued compared to similar firms, but it's cheap enough on an absolute basis to warrant further upside.
The idea of investing in a firm that, like Tennant Company ( TNC ), produces mechanized cleaning equipment for industrial and commercial use may not seem like the most exciting way to try and generate attractive returns. However, the company has done incredibly well as of late, with strong sales, profits, and cash flows pushing the stock higher. What is really exciting is that, when factoring in management's guidance for 2023, the stock still looks fundamentally attractive to the point that, in my book, it still warrants a 'buy' rating.
Great results so far
The last article that I wrote about Tennant Company was published on December 13th of 2022. In that article, I talked about how the company had seen a weakening of sales, profits, and cash flows throughout the 2022 fiscal year because of inflationary pressures and foreign currency fluctuations. Looking deeper, I concluded that the organic growth the company had experienced was encouraging and I believed that the business should fare well in the long run. On top of this, shares of the company were priced low enough that I could not help but to keep the 'buy' rating I had assigned the business previously. This kind of rating is what I give to a firm that I believe should generate upside that should exceed the broader market. And so far, Tennant Company has done just that. While the S&P 500 is up only 0.7%, shares of our prospect have generated a return for investors of 13.5%.
This massive return disparity over such a short period of time was likely driven by the firm's performance for the final quarter of its 2022 fiscal year. During that time, sales came in at $291 million. That's 5.3% higher than the $276.4 million the business reported the same time one year earlier. Growth would have been even higher at 9.7% had a not been for foreign currency fluctuations. On an organic basis, the greatest growth for the company came from its Americas operations, with revenue spiking 16%. This was driven largely by higher selling prices across the region and volume increases throughout Latin America. In the EMEA (Europe, Middle East, and Africa) regions, organic growth came in at 2.3% thanks primarily to higher selling prices and equipment and parts, as well as consumables. The only weakness the company saw was from the Asia Pacific region. Organic growth there fell 7.5%, largely the result of volume declines in China because of government shutdowns related to COVID-19 and the impact those shutdowns had on demand.
The rise in revenue the company experienced during this time brought with it improved profits. Net income, for instance, more than tripled from $7.9 million to $23.8 million. Higher selling prices and increased volume, all played a role in pushing the company's gross profit margin up from 36.4% to 39.6%. Other profitability metrics followed suit. Operating cash flow, for instance, more than doubled from $6.5 million to $13.7 million. If we adjust for changes in working capital, it would have risen from $20.2 million to $32.6 million. Meanwhile, EBITDA for the enterprise expanded from $28.4 million to $41.7 million.
The final quarter of the 2022 fiscal year was truly a bright spot for the business. Had it not been for those robust results, 2022 would have been rather unappealing from a fundamental perspective. As it stands, revenue for the year did still increase by about $2.2 million. But rounded to the second decimal point, it still was virtually flat at $1.09 billion. Net income inched up only marginally from $64.9 million to $66.3 million. The firm saw its operating cash flow tank from $69.4 million to negative $25.1 million. Even on an adjusted basis, it fell from $117.8 million to $106.8 million, while EBITDA declined from $140.2 million to $133.7 million. The pains experienced for the year as a whole were driven largely by foreign currency fluctuations and margin compression associated with elevated prices. But clearly, by the fourth quarter, that picture was improving drastically.
For the 2023 fiscal year, management said that revenue should be between $1.115 billion and $1.155 billion. This should be driven by organic revenue growth of between 3% and 7%. Adjusted earnings per share should come in at between $3.70 and $4.50. That should translate to net income for the business of roughly $76.7 million. Meanwhile, EBITDA it's forecasted to be between $140 million and $160 million. Based on my estimates, this would translate to adjusted operating cash flow of around $119.8 million. Using these figures, we can easily value the firm.
On a forward basis, the company is trading at a price-to-earnings multiple of 17.5. This is down from the 20.2 reading that we get using data from 2022 and compares favorably to the 20.6 reading that we get using data from 2021. The price to adjusted operating cash flow multiple, meanwhile, should come in at around 11.2. For context, in 2022, that number was 12.5, while for the 2021 fiscal year it totaled 11.4. And finally, we have the EV to EBITDA multiple. This should be 10.4 on a forward basis. By comparison, using the data from 2022, we get a reading of 11.7, while the 2021 data gives us a reading of 11.2. As part of my analysis, I compared the company to five similar enterprises. On a price-to-earnings basis, these firms ranged from a low of 6.4 to a high of 88.7. Using the EV to EBITDA approach, we end up with a range of between 4 and 41.3. In both cases, three of the five companies were cheaper than Tennant Company. Finally, using the price to operating cash flow approach, we end up with a range of between 5.8 and 41.5. In this case, two of the five firms were cheaper than our prospect.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Tennant Company | 20.2 | 12.5 | 11.7 |
Mueller Industries ( MLI ) | 6.4 | 5.8 | 4.0 |
SPX Technologies ( SPXC ) | 88.7 | 41.5 | 41.3 |
Mayville Engineering Company ( MEC ) | 17.4 | 6.3 | 6.9 |
The Timken Company ( TKR ) | 16.0 | 14.0 | 10.3 |
Parker-Hannifin ( PH ) | 37.3 | 18.7 | 22.5 |
Takeaway
From the data that I can see, it looks as though the fundamental condition of Tennant Company is improving. Based on management's guidance, it's likely to continue improving throughout 2023. Shares are not exactly the cheapest on the market. But they are trading at levels that are fundamentally attractive on an absolute basis, even though they are more or less fairly valued compared to similar firms. All of these factors combined make me feel comfortable keeping the company as a 'buy' prospect, even though shares have experienced a nice bit of upside as of late.
For further details see:
Tennant Company: Investors Are Cleaning Up Nicely