Earlier this month, the National Advertising Division (NAD) of the BBB ruled against Tennant (TNC) regarding the way it was advertising its ec-H2O technology. Nilfisk-Advance, Inc., another commercial floor cleaning equipment manufacturer and Tennant's competitor, took issue against the words Tennant was using to advertise its technology. In response to the ruling, Tennant took down some of the claims such as "Tennant's ec-H20 is proven to reduce environmental impact by up to 98%" and "ec-H20 technology makes water perform like a powerful detergent."
Nilfisk-Advance acted like it scored a major victory, and spread the news of the NAD's decision. I believe that in reality Tennant Company emerged the victor, because it just gave its product more media attention.
From the article, it said:
"NAD acknowledged that the scientific analysis and collective testing evidence provided a foundation for the utility of the ec-H20 technology in commercial scrubbers and for its general efficacy as a cleaner. NAD acknowledged that two of the advertiser's tests provided a basis for the chemical mechanism of ec-H20 as a cleaner.
NAD determined, however, that the advertising communicated a message of superior cleaning performance which was not supported by the evidence of comparative testing in the record.
NAD found that while one test which compared ec-H20 technology against five different cleaners demonstrated that the ec-H20 technology produced similar results to the detergent based method for the removal of heavy stains or common soils, the ec-H20 technology was less effective when the soil load was very heavy or where the soil was difficult to hydrate."
My response to the apparent demoting of the technology is ... DUH!! I think it's obvious to any rational person that simply ionized water wouldn't clean as deeply as mixing the water with powerful chemicals. If you want to be able to completely rid a floor of germs to be able to eat off it, like for a hospital, then I wouldn't use the ec-H2O. However, if you just want to make the floor look good, like at a mall or stadium, then the ec-H2O is a cheaper, eco-friendly alternative to chemical cleaning. In fact, the NAD confirmed that the technology is effective by saying it "produced similar results to the detergent based method."
Tennant has been consistently stealing market share from Nilfisk-Advance, so its accusation of unacceptable advertising is out of desperation. With advertising in general, colorful language is used to get people's attention. The wording that Tennant used, but was forced to change, was vague enough that it was OK in my opinion. I also don't think the removal of it will affect the company's sales.
A Slow Quarter Has Created A Buying Opportunity
Tennant Co. dropped heavily on a revenue and earnings miss for its first quarter, 2012 earnings report. It dropped from a close of $47.84 on April 20, to $41 on April 24th, for a pullback of 14.3%.
Analysts expected $177.8 million in revenue and $0.39/share in earnings. The company reported only $173.7 million in revenue and $0.28/share in earnings.
The company reported lower sales partially from increased tightening of credit in Europe. However, the company says there is a backlog of orders for the second quarter, and it expects to still hit the 2012 full year results of $2.30 to $2.45 per share with revenue of $790 to $805 million. With the 14% pullback in the stock, the market doesn't believe the company will hit expectations this year. But why would the company lie? It has a great product and growth is strong, it could easily have lowered expectations and blamed it on Europe. Now the CEO, Chris Killingstad, has put a lot of pressure on himself and will take a lot of heat if expectations aren't hit. From what I've seen Mr. Killingstad say and do, I respect his congruency, and I believe he's a good CEO.
The following is the actual and estimated earnings per share from the company for the years 2006-2013.
In the table shown above, 2011 earnings has surpassed that of 2007. It shows the company expects growth of 20.5% in 2012 and 18.7% in 2013. At the current price of $41, it's clear the market doesn't believe the company's growth expectations. Using an 8% discount rate, $41 would would be the appropriate share price if the company grows as it expects in 2012 and 2013, and averages about 8% growth in the years 2014-2016, and then perpetual 3% growth up until 2021 and then flat earnings after that. Overall, that's a very sharp growth decline.
I've valued the company at $56 using the same discount rate and assuming the growth rate gradually declines after 2013 to flat earnings at 2025. I believe that's the appropriate valuation.
Sales growth for Tennant should be very strong in Asia in the next decade. In 2011, the Americas sales increased 13.4% to $481.4 million, Europe, Middle East, and Africa increased 9.1% to $188.3 million, and Asia Pacific sales increased 19.3% to $84.2 million. Asia Pacific sales is only 11% of total sales right now.
In quarter 1, 2012, compared to the same quarter in 2011, sales in Asia were down 1.8%, or 5.3% organically, primarily due to unusually large shipments in the 2011 first quarter in Australia. However, China achieved organic sales growth of approximately 15% in the 2012 first quarter. That is a very great result in China, because it is a gigantic market and sales will breed more sales.
Right now, Tennant's products are purchased because they are cost effective, and not so much for environmental safety. However, in about five years or so, companies will really start to weigh environmental factors. That's another plus that will increase Tennant's sales.
Trade recommendation: Buy