Is Tennant Company Stock a Buy? In value investing, somewhat obscure companies that make essential products are often good places to look for investment opportunities. One such company that appears to be undervalued at the moment is Tennant Company (NYSE:TNC).
This equipment manufacturer may not be a cutting-edge play on the latest generation of technology, but the stock could present investors with an opportunity to make generous returns. Here’s what you need to know about Tennant and its potential as a value buy.
Tennant is a manufacturer of surface and floor cleaning machines. The company also produces lines of environmentally friendly and detergent-free cleaning products.
Tennant’s products include walk-behind floor scrubbers, riding floor scrubbers, floor sweepers and vacuums.
Tennant Revenue, Earnings and Growth
In Q2, Tennant reported revenues of $280.2 million, an increase of just 4.4 percent over the previous year. While this growth is obviously lackluster, management explained that ongoing supply chain disruptions had led to a sales backlog that stifled revenue growth. Sales growth was strong in the North and South American markets, while sales in Europe and Asia lagged.
Tennant also reported earnings of $0.92 per share. This number was down substantially from Q2 2021, when Tennant earned $1.18 per share. Q2’s earnings did, however, demonstrate solid sequential growth and suggest that the company could be in the early phases of a recovery. Earnings for Q4 2021 and Q1 2022 were reported at $0.71 and $0.73 per share, respectively.
In the most recent quarter, Tennant did have to deploy additional cash from its reserves to combat inflation and acquire parts from strained supply chains.
However, the company maintains a reserve of $73.8 million. While this is well below the company’s total liabilities of $264.9 million, the current cash reserve appears sufficient for Tennant’s needs.
Looking forward, analysts predict an average 5-year growth rate of 15 percent. Next year, projections suggest 13.9 percent growth. If these forecasts are accurate, Tennant stock could be a steady growth option for buy-and-hold investors.
Tennant Target Price and Valuation
Analysts predict that Tennant stock will reach a median target price of $85 in the next 12 months. This would give the stock an upside of just over 50 percent from its current price of $56.63.
Even more encouraging is the fact that all analyst price forecasts agree that Tennant will rise markedly in the coming year. Even the lowest price target of $82 would allow the stock to return nearly 45 percent in just one year.
In large part, this expected surge in price is supported by Tennant’s apparent undervaluation. The stock’s forward P/E currently stands at just 12.74, while the price-to-sale ratio is 0.97. Cash flow is also quite positive at $7.36 per share.
Between these factors and the company’s growth prospects over the coming years, there’s a strong case to be made that the stock is priced well below its true value.
This value argument becomes even more compelling when Tennant’s dividend is taken into account. Tennant stock currently yields 1.76 percent, paying out $1 annually. This distribution has been increasing for 49 consecutive years, and the current dividend payout ratio of 33.3 percent strongly suggests that the company can continue this streak.
Will Supply Chain Disrupt Tennant?
The most pressing risk factor for Tennant is its continuing supply chain trouble. Management has invested in better supply chain logistics, which should improve production, revenue and margins in the second half of 2022.
Macroeconomic conditions could also strain Tennant. As noted above, the company was forced to deploy cash in the most recent quarter to combat inflationary pressures. If these pressures don’t subside, Tennant could find itself drawing down its cash reserves. At present, the company’s balance sheet is reasonably strong.
Debt is also a modest risk factor for Tennant. The company’s debt-to-equity ratio is 0.6, and total liabilities significantly outweigh its cash reserves. This risk factor is a relatively minor one, but it could become more relevant as interest rates rise.
Finally, potential investors should consider the slow growth of international sales. In the most recent quarter, sales in Europe, the Middles East and Africa rose by just 3 percent. Sales in the Asia-Pacific market, meanwhile, shrank by 4.5 percent. The North American market is Tennant’s largest and most important, but sluggish international sales could affect growth or keep the company from reaching its full potential.
Is Tennant a Buy?
Although Tennant is exposed to certain macroeconomic risks, the stock still appears to be meaningfully undervalued. Given its low P/E ratio, decent future growth prospects and dividend yield, Tennant looks to be a reasonable stock to buy and hold for respectable returns.
Having been in business since 1870 and being one of the major suppliers of professional floor cleaning equipment in the US, Tennant also has a decent moat around its business. The company seems unlikely to lose market share, and the need for its equipment will likely remain consistent in the years to come.
Debt and supply chain snarls are both real concerns that investors should be aware of before buying Tennant stock. The potential upside, however, seems to considerably outweigh the risks presented by these factors. This is especially true in light of the fact that supply chain issues are gradually resolving. Assuming the situation continues to improve, Tennant’s risks appear to be manageable.
Overall, Tennant appears to be a strong opportunity for value investors who are willing to buy the stock and hold it for the medium to long term. Tennant could produce outsized returns over the next few years, and the company appears safe enough even for moderately conservative investors.
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