ERP Modernization And X4 ROVR Launch Will Improve Future Operational Efficiencies

Key Takeaways

• Strategic investments and acquisitions in the Americas and Eastern Europe are poised to enhance revenue and earnings due to successful integration and growth.
  
• Pricing initiatives and product innovations are likely to boost margins and offset inflation, underpinning revenue growth and operational efficiencies.
  
• Challenging market conditions and operational cost pressures may hinder revenue and margin growth, with limited geographic diversification compounding risks.

Catalysts

Designs, manufactures, and markets floor cleaning equipment in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

• Tennant's strategic investments in the Americas are leading to higher order rates that outpace market growth, which should positively impact future revenue growth.
  
• Pricing initiatives across geographies are expected to drive growth by achieving annual price increases of 50 to 100 basis points, likely boosting net margins by offsetting inflationary pressures.
  
• New product development, especially with innovative offerings like the X4 ROVR, is anticipated to contribute 150 to 200 basis points of growth over the long term, which will enhance revenue and potentially expand margins due to the differentiated product portfolio.
  
• The ERP modernization project is expected to unlock operational efficiencies and provide a scalable global platform, improving earnings through cost savings and productivity gains.
  
• Tennant's acquisition of TCS in Eastern Europe is outperforming expectations. Successful integration and aggressive growth plans for this acquisition are likely to drive incremental revenue and improved earnings from enhanced market presence in the region.

Tennant Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tennant's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.5% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $114.3 million (and earnings per share of $5.82) by about December 2027, up from $108.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.4x on those 2027 earnings, up from 14.7x today. This future PE is greater than the current PE for the US Machinery industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

Tennant Future Earnings Per Share Growth

Risks

• Sluggish economic conditions in EMEA and a challenging business environment in APAC, particularly in China and Australia, could create headwinds for revenue growth in these regions.
  
• The accelerated reduction of the 2024 backlog, especially due to lower-than-anticipated demand for industrial equipment and extended replacement cycles in the rental channel, may pose challenges for future revenue growth.
  
• Inflationary pressure on materials and elevated freight costs have negatively impacted gross margins and could continue to do so if not fully offset by pricing initiatives.
  
• The integration and costs related to the ERP modernization and the acquisition of TCS may increase operating expenses in the short-term, which could weigh on net income and margins.
  
• APAC, where there is significant exposure to market challenges in China, contributes only 7% of enterprise-level sales, indicating limited geographic diversification which can impact overall earnings growth.

Valuation

• The analysts have a consensus price target of $129.5 for Tennant based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $114.3 million, and it would be trading on a PE ratio of 26.4x, assuming you use a discount rate of 7.1%.
• Given the current share price of $83.94, the analyst's price target of $129.5 is 35.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.