My Top Idea call on August 20, 2013 to buy Techtronic (OTCPK:TTNDY) worked okay for a while, as the stock rose almost 20% through to year-end. Shortly thereafter, worries about the soundness of the housing play as an investing them started to creep into the market, stimulated by weaker housing starts and existing sales and worries about the economy as a whole. That took a lot of the steam out of Techtronic, as well as rival Stanley Black & Decker (SWK) and major retailing partner Home Depot (HD).
I believe the Techtronic story remains an appealing one. Techtronic has been a share-gainer in the U.S. with its Ryobi and Milwaukee tool lines, and still has yet to really address the European or major emerging markets in a big way. Likewise, I continue to believe that the company can do better with its floor care business, with a resulting uplift to margins. With margins and returns on capital heading in the right direction and a housing market only in the early phases of recovery, I still believe Techtronic has a lot to offer at these levels.
Floor Care May Be Turning Around
Regrettably, Techtronic doesn't report quarterly earnings so it looks like we'll have to wait another month or so to see whether the progress seen in the first half of fiscal 2013 carried through the remainder of the year.
As a reminder, Techtronic has had a difficult time competing with established floor care companies like Bissell, Dyson, and Electrolux (OTCPK:ELUXY), as the company has struggled to find the right sort of price/quality mix and drive improved margins. Techtronic has addressed this on two fronts - introducing over 20 new models in 2013 and moving manufacturing from Mexico to China.
The early results (1H'13 results, reported back in August) were encouraging. Revenue growth in the floor care business doubled that of the tools business, growing 17%. It was also more profitable growth, as margins improved 60bp (to over 4%) after excluding one-time costs related to the manufacturing change.
There's nothing so fundamentally broken about the Hoover or Dirt Devil brands that they cannot be fixed. Repositioning the brands as premium brands is going to take some doing, but management seems to recognize that improvements in quality, design, and performance are all essential for better results. As reviews in places like Consumer Reports have been trending up, I am encouraged that the company is on the right track.
Tools Still Have Years Of Potential Recovery
Not only am I bullish on Techtronic's prospects for turning around the floor care business, I also believe the power tools business is looking at a multiyear run of better growth driven by increasing construction and renovation activity. I do have some concerns that the first quarter of 2014 could be tough on sentiment; I will not be too surprised if Stanley Black & Decker, Home Depot, and Lowe's (LOW) report that the miserable winter weather slowed down sales.
Going back and comparing first halves, Techtronic saw 8% growth in its tools business versus about 5% growth at Stanley. Those are admittedly stale comparisons, but 5% organic growth in North American tool sales at Stanley gives me some confidence that Techtronic continued to perform reasonably well.
Looking ahead, I expect Techtronic to continue outgrowing the market. The Milwaukee brand has been gaining share in the professional tool segment, helped by introductions like the company's FUEL line which offers better torque than cordless tools from Stanley, Makita (OTCPK:MKTAY), Hitachi, and Bosch.
I also expect the company to put more resources into building up Homelite - the company's line of outdoor power equipment like chainsaws, trimmers, and leaf blowers. Whereas Hoover and Ryobi are pretty much household names at this point, I don't believe the same is true for Homelite. Better brand support could help drive sales, but if a look at Home Depot's website is any indication, an increased focus on product quality and price/value may also be in order.
Last and not least, I'm looking for Techtronic to start addressing Europe in a more meaningful way. European sales are only about 20% of total sales, and Techtronic will regret missing out on the recovery that seems to be slowly underway in Europe. This is a "takes money to make money" opportunity, though, as the company is going to need better distribution to really gain share and Europe does not have the same sort of dominant home center stores like Home Depot and Lowe's.
No Heroic Assumptions Here
I do not believe that a long-term revenue growth rate of 7% is particularly demanding for Techtronic, given where U.S. construction and renovation activity sits today. I don't see much likelihood that activity will re-test prior peaks anytime soon, but I think 4% to 5% annual market growth, coupled with price increases and share gains can get Techtronic where it needs to be. I likewise do not believe that my margin assumptions for Techtronic are too demanding, as I'm looking for about two to two and a half points of incremental FCF margin improvement and at least half of that could come from just getting floor care off the floor.
The Bottom Line
Discounting the resulting 10% free cash flow growth back, I arrive at a fair value of about $15 per share today. There's definitely risk that weather or economic issues will lead to shaky quarters here and there, and there are also execution risks where floor care and European share growth are concerned. I believe that the company will come out on top, though, and I think there's enough potential here to warrant a deeper dive for readers looking to play the housing recovery.