Tennant (TNC -0.91%) is the global leader in manufacturing mechanized cleaning equipment, such as scrubbers, sweepers, pressure washers, vacuums, and autonomous mobile robots.
Since the turn of the century, Tennant has delivered total returns of over 700%, exceeding the S&P 500's mark of roughly 500% over the same time. This outperformance occurred in spite of the company's recent 25% share price drop from its 2024 highs.
Following this drop, Tennant's share price is back to where it started the year and looks to be trading near a once-in-a-decade valuation. While a discounted valuation like this would typically imply that something with the company is going wrong, I'd argue that Tennant's future looks brighter than ever, making it a promising investment today.
Tennant: The global leader in mechanized cleaning equipment
Tennant believes it holds a leading 14% market share of the $9 billion mechanized cleaning industry. The company is particularly dominant in North America, Mexico, and Brazil, where it commands a 25% share of industry sales.
Outside of the Americas, Tennant holds the No. 1 spot in Australia and New Zealand and also sells to Europe, China, and India. The company has between 5% and 10% of the market in these regions.
Although Tennant is a cleaning equipment manufacturer, it generates 36% of its sales from aftermarket revenue, such as parts, consumables, services, and software. In fact, aftermarket sales throughout a machine's usable life have historically equaled 80% of the equipment's original cost. These post-purchase sales create a long-lasting stream of recurring revenue for Tennant to receive after the original equipment sale.
Tennant has intensified its focus on growth through autonomous mobile robots (AMRs), recently signing an exclusive technology agreement with Brain Corp., a robotic navigation system expert. These AMRs work independently, with minimal human interaction necessary. AMRs also bring the potential for new annually recurring revenue from software subscriptions.
Last quarter, Tennant launched the X4 ROVR, its newest AMR that incorporates Brain Corp.'s technology, and it has already announced that it had to increase production to keep up with anticipated orders. In addition to this new demand, previous generations of AMRs continue selling well, with management stating, "AMR unit sales, including the export over for the first half of 2024, are trending well ahead of both the prior year and previous multiyear averages."
Over the last five years, Tennant's profitability has ballooned as it has shifted its focus from manual and mechanical equipment to these tech-dense AMRs.
TNC Net Profit Margin and ROIC data by YCharts.
This rising return on invested capital (ROIC) is essential to investors as it shows the company is improving its ability to generate profits from its debt and equity -- a feat that frequently leads to a stock outperforming. Meanwhile, a rising net profit margin -- and the subsequent free cash flow (FCF) the company generates from it -- funds Tennant's ability to remain a Dividend King.
A Dividend King with ample funding for larger payout increases
Tennant has been raising its dividend payments for 51 consecutive years now, allowing it to become a Dividend King. While the company has only grown these payments by 5% over the last five years, its falling payout ratio could suggest that bigger increases may be incoming.
TNC Payout Ratio data by YCharts.
Tennant's payout ratio of 19% shows that its 1.2% dividend payments are easily supported, with ample room for continued increases.
Although management has over 800 merger and acquisition (M&A) targets in its pipeline, a larger dividend increase could be forthcoming if no deals go through. If Tennant finds a good acquisition, that would be a positive for investors as Tennant has a solid track record of successfully integrating newly purchased businesses, like IPC Group in 2016, which doubled the company's size in Europe.
Despite paying $350 million for IPC, Tennant's return on invested capital steadily rose to its current mark of 14%, showing the company's ability to generate outsize profits from the debt and equity it uses for M&A.
Tennant's valuation demands minimal growth
Even with the intrigue surrounding Tennant's AMR potential and its long-standing track record of dividend growth, its earnings yield (inverse of price-to-earnings ratio, so higher is cheaper) of 6.3% remains near 10-year highs.
TNC Earnings Yield5 data by YCharts.
Plugging the company's FCF into a reverse discounted cash flow calculator shows that Tennant would only need to grow FCF by 3% annually over the next decade to justify its current price. With management guiding for sales to grow between 3% and 5% over the long term -- not to mention the improving profitability it expects -- Tennant could quickly outgrow its valuation if it meets its growth goals.
Ultimately, Tennant's AMR growth opportunity, combined with its improving profitability, discounted valuation, and status as a Dividend King, make the company an excellent business to buy and hold for decades.
