Tennant Company: Still Attractive, Even In Light Of Expected Weakness

Tennant Company's (TNC) stock has underperformed the S&P 500, declining 13.6% since early March, driven by disappointing Q1 2025 results including a 6.8% revenue decrease to $290 million and a net income drop from $28.4 million to $13.1 million due to volume declines, increased costs, and currency headwinds. Management forecasts a 4.4% revenue decline for fiscal year 2025, with EPS between $3.80 and $4.30, impacted by an estimated $40 million hit from trade war effects; however, the author maintains a 'buy' rating, citing attractive valuation multiples relative to peers despite acknowledging potential for further weakness due to broader economic conditions.

Analysis

Tennant Company (TNC) has experienced significant stock underperformance, declining 13.6% since early March while the S&P 500 rose 3.5%, primarily attributed to disappointing Q1 2025 financial results. Revenue in Q1 2025 fell 6.8% year-over-year to $290 million, driven by a 5% organic revenue decline largely due to a 4.9% volume reduction as a significant backlog reduction benefit from Q1 2024 unwound, particularly in North America; this was partially offset by the acquisition of TCS but negatively impacted by a 2.1% currency headwind. Profitability suffered more acutely, with net income plummeting from $28.4 million to $13.1 million, as selling and administrative costs rose to 31.28% of sales from 28.91% (an additional $6.9 million in pre-tax expenses) and gross profit margin contracted from 44.21% to 41.38% due to product/channel mix shifts and inflationary pressures. Consequently, adjusted net profits dropped from $34.7 million to $21.2 million, operating cash flow turned negative to -$0.2 million from $2.9 million (adjusted operating cash flow declined from $44.5 million to $31.7 million), and EBITDA decreased from $54.9 million to $41 million. Management's outlook for the full 2025 fiscal year anticipates continued weakness, forecasting revenue between $1.21 billion and $1.25 billion (a 4.4% decline at midpoint from 2024), with organic revenue expected to drop 1% to 4%. Earnings per share are guided to $3.80-$4.30 (midpoint net profit $76.8 million, down from $83.7 million), and adjusted EPS is expected between $5.70 and $6.20 (midpoint adjusted net profit $112.8 million, down from $125.5 million). EBITDA is projected between $196 million and $209 million (midpoint $202.5 million, down from $208.8 million). A significant factor is an estimated $40 million impact from the ongoing trade war situation, which the company is attempting to mitigate through pricing actions, cost-cutting, and supply chain adjustments, including sourcing from lower-tariff nations. Despite these headwinds and acknowledged broader economic concerns, the company's valuation is presented as attractive, trading at favorable multiples on both an absolute basis (notably EV/EBITDA) and relative to peers, where it is reportedly the cheapest on a price-to-earnings basis among five comparable firms, leading the source article to maintain a 'soft buy' rating.

Key Decisions for Investors

• Investors should acknowledge the significant near-term headwinds facing Tennant Company, including declining Q1 2025 revenues and profits, and a full-year forecast for continued contraction impacted by trade wars and macroeconomic uncertainties.
• Consider the current valuation, which the article suggests is attractive relative to peers and historical metrics, potentially presenting an opportunity for long-term, value-oriented investors comfortable with the heightened risk profile and the need for patience.
• Closely monitor the effectiveness of management's mitigation strategies against trade war impacts, such as price increases and supply chain diversification, as well as any shifts in organic growth trends in subsequent quarterly reports.
• Given the 'soft buy' rating juxtaposed with recent underperformance and ongoing challenges, a cautious investment approach may be warranted, potentially involving gradual position building while being prepared for further volatility until operational improvements and a more stable economic environment materialize.