Tennant has had an impressive run over the past six months as its shares have beaten the S&P 500 by 9.9%. The stock now trades at $87.58, marking a 18.4% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Tennant, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Tennant Will Underperform?
We’re happy investors have made money, but we’re cautious about Tennant. Here are three reasons you should be careful with TNC, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Tennant grew its sales at a sluggish 3.7% compounded annual growth rate. This was below our standard for the industrials sector.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Tennant’s weak 2.7% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability 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).
On average, Tennant’s ROIC decreased by 4.5 percentage points annually each year 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
Tennant doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 15.2× forward P/E (or $87.58 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Like More Than Tennant
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