Over the past six months, Tennant’s stock price fell to $65.94. Shareholders have lost 14.3% of their capital, which is disappointing considering the S&P 500 has climbed by 14.3%. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
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Why Do We Think Tennant Will Underperform?
Even though the stock has become cheaper, we’re passing on Tennant for now. Here are three reasons why there are better opportunities than TNC, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Tennant’s sales grew at a sluggish 2.5% compounded annual growth rate over the last five years. This fell short of our benchmarks.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Tennant, its EPS declined by 2.1% annually over the last five years while its revenue grew by 2.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Tennant’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Tennant, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 13.4× forward P/E (or $65.94 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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