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Is TNC a Good Industrial Stock to Buy to Ride out Demand Trends?

Despite rising inflationary pressures, Tennant (TNC) has not revised its annual net sales guidance. The company is confident in riding out the uncertain macroeconomic environment on the back of continued demand for its products and services. So, will it be wise to buy the stock now? Read on to learn our view…

Tennant Company (TNC) designs, manufactures and markets floor cleaning equipment. It offers its products under the Tennant, Nobles, Alfa Uma Empresa Tennant, IRIS, VLX, IPC, Gaomei, Ronge, and Rongen brands.

Despite rising costs and lingering supply chain issues, industrial production was up 4.2% year-over-year in June. The demand for industrial goods is expected to remain strong as the economy continues to recover from the pandemic, but the industrial sector’s growth is expected to be marred by input shortage and inflation.

TNC President and CEO Dave Huml said, “Overall, our first quarter financial performance aligns with our expectations, and demand for our products and services remains strong, achieving pre-pandemic demand levels. We continue to take actions to offset inflationary pressures and increase production to serve our customers as well navigate through current operating conditions.”

The company expects strong demand for its products throughout the year as it did not revise its fiscal 2022 guidance for net sales and organic net sales growth. Its net sales are expected to come between $1.12 billion and $1.17 billion, while its organic net sales growth is expected to be 4.5%-8.5%.

However, TNC has revised its guidance for adjusted EPS and adjusted EBITDA. Its adjusted EPS is expected to be in the range of $4.15 to $4.75, down from $4.4 to $5 projected earlier. It also reduced its adjusted EBITDA projection from $145-$160 million to $140-$155 million.

Huml said, “We are pleased with the strong, continuing demand for Tennant products and are encouraged by the commitment and agility of our teams in addressing the changing market landscape to meet this demand.”

“Macroeconomic headwinds and geopolitical risk factors have worsened, and our revised guidance reflects the current operating environment, which is constrained by parts availability and higher inflation. We are working creatively and diligently to overcome these challenges and remain well positioned to capitalize on any improvement in parts availability,” he added.

Shares of TNC have gained 9.6% over the past month. However, the stock has declined 22.1% year-to-date and 19.3% over the past year to close the last trading session at $63.08.

Here’s what could influence TNC’s performance in the upcoming months:

Disappointing Financials

TNC’s net sales declined 1.9% year-over-year to $258.10 million for the first quarter ended March 31, 2022. The company’s operating income decreased 59.7% year-over-year to $14.60 million. In addition, its net income declined 59.9% year-over-year to $10.30 million. Also, its EPS declined 59.8% year-over-year to $0.55.

Mixed Analyst Estimates

TNC’s revenue for fiscal 2022 and 2023 is expected to increase 5.1% and 2.8% year-over-year to $1.15 billion and $1.18 billion, respectively. Its EPS for fiscal 2022 is expected to decline 2.4% year-over-year to $4.29, while its EPS for fiscal 2023 is expected to increase 10.4% year-over-year to $4.73.

Discounted Valuation

In terms of forward EV/EBITDA, TNC’s 9.58x is 5.4% lower than the 10.13x industry average. Its forward P/S of 1.02x is 19% lower than the 1.26x industry average. Also, the stock's 1.19x forward EV/S is 25.7% lower than the 1.60x industry average.

Mixed Profitability

In terms of trailing-12-month EBIT margin, TNC’s 6.71% is 30% lower than the 9.59% industry average. Likewise, its 11.51% trailing-12-month EBITDA margin is 11.6% lower than the industry average of 13.04%.

However, its 39.02% trailing-12-month gross profit margin is 31.8% higher than the 29.59% industry average. Also, its 1.02% trailing-12-month asset turnover ratio is 28.9% higher than the industry average of 0.79%.

POWR Ratings Show Promise

TNC has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TNC has a B grade for Value, consistent with its 1.19x forward EV/S, 25.7% lower than the 1.60x industry average.

The stock is trading above its 50-day moving average of $60.14 but below its 200-day moving average of $73.61, justifying its C grade for Momentum. Also, it has a C grade for Sentiment, in sync with its mixed analyst estimates.

TNC is ranked #4 out of 80 stocks in the B-rated Industrial – Machinery industry. Click here to access TNC’s Growth, Stability, and Quality ratings.

Bottom Line

Despite the current inflationary pressures, TNC is confident its demand will remain strong throughout the year. The company’s organic net sales growth is expected to increase by 4.5%-8.5%. TNC is also confident of capitalizing on any improvement in parts availability. 

Given its discounted valuation and strong demand for its products, it could be wise to invest in the stock now.

How Does Tennant Company (TNC) Stack Up Against its Peers?

TNC has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Industrial - Machinery stocks with an A (Strong Buy) rating: Thermon Group Holdings, Inc. (THR), THK Co., Ltd. (THKLY), and Komatsu Ltd. (KMTUY).

TNC shares were trading at $62.83 per share on Friday morning, down $0.25 (-0.40%). Year-to-date, TNC has declined -21.90%, versus a -15.56% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.


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