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Elevator Pitch
I rate Techtronic Industries Company Limited’s (OTCPK:TTNDY) [669:HK] stock as a Buy.
In my prior June 1, 2022 update for Techtronic Industries, I did a preview of the company’s first-half earnings by assessing the financial results of its sales partner and competitor. I focus on Techtronic Industries’ share price weakness post-1H 2022 results and its 2023 outlook with the current article.
I decide to retain a Buy rating for Techtronic Industries. The stock’s forward P/E is now close to its 10-year low, and I see the company delivering a strong set of results for fiscal 2023.
Geographical Mix Explains Weak Stock Price Performance
I previously highlighted in my June 2022 write-up that the company’s “1H 2022 performance might surpass market expectations.” Techtronic Industries subsequently announced on August 10, 2022 that its earnings per share grew by a decent +10.4% YoY to $0.3159 in the first half of the year.
The market responded positively to Techtronic Industries’ above-expectations bottom line, as TTNDY’s stock price rose by +7.3% to close at $60.90 on the next trading day, August 11, 2022. TTNDY’s shares continued its strong share price momentum in the next week, and eventually closed at a three-month high of $67.04 as of August 17, 2022.
But good times didn’t last for long, as Techtronic Industries’ shares experienced a significant pullback in the past two and a half months. TTNDY’s last traded stock price was $47.51 as of October 31, 2022, which implied that the company’s share price has halved since the beginning of this year. In my opinion, Techtronic Industries’ geographic mix is the key reason for the company’s poor stock price performance.
As disclosed in the company’s most recent interim financial results announcement, Techtronic Industries generated 76.7% of its top line for the first half of the current year from North America. North America was the slowest growing market for TTNDY in 1H 2022 boasting a YoY revenue growth of +10.5%. In contrast, the company’s European and other markets delivered relatively higher YoY top line expansion rates (adjusted for foreign exchange effects) of +14.1% and +23.0%, respectively, in 1H 2022.
Investors are justified in being concerned that North America will continue to be the weak spot for Techtronic Industries in 2H 2022. New residential sales in the US fell by -10.9% MoM (Month-on-Month) to 603,000 units in September 2022. This implies that US new home sales have decreased by as much as -39.3% as compared to the historical peak of 993,000 units registered in January last year.
Given that Techtronic Industries derived more than three-quarters of its revenue from the North American geographical region, it is reasonable to assume that the US housing market weakness will hurt its financial performance in the near term. This is reflected in the sell-side’s consensus financial forecasts for TTNDY. Based on S&P Capital IQ data, analysts predict that Techtronic Industries’ top line will contract by -1.0% YoY in 2H 2022, as compared to a +10.0% YoY top line growth for 1H 2022. In addition, the market consensus sees TTNDY’s EPS declining by -0.8% YoY in the second half of this year.
Current Valuations Are Below Historical Averages
In my view, Techtronic Industries’ valuations have already come down to reasonably attractive levels.
The market is now valuing Techtronic Industries at a consensus forward next twelve months’ normalized P/E ratio of 13.7 times according to valuation data taken from S&P Capital IQ. The stock’s current P/E multiple is a mere +2% above its 10-year trough P/E of 13.4 times, and -31% below its 10-year mean P/E of 19.8 times.
Techtronic Industries’ shares still appear to be very cheap, even if one uses another valuation metric apart from P/E. The stock currently trades at 14.2 times consensus forward next twelve months’ EV/EBIT, and this is -22% lower than its 10-year average EV/EBIT multiple of 18.3 times.
Positive Outlook For 2023
I noted earlier in this article that TTNDY is expected to record a decline in both its top line and bottom line in YoY terms for 2H 2022 with the US housing market weakness being a key headwind for the company.
However, I expect Techtronic Industries to achieve a significant turnaround in 2023, which should act as a re-rating catalyst for the company’s shares. Specifically, I estimate that TTNDY should be able to grow both its revenue and EPS growth by more than +10% next year, which will represent a sharp reversal from the company’s expected negative growth in the second half of this year.
There are two key factors supporting my bullish view on Techtronic Industries’ 2023 prospects.
The first factor is new products driving market share gains and higher profit margins for TTNDY in 2023 and beyond. At its 1H 2022 earnings briefing on August 10, 2022, Techtronic Industries emphasized that it will “achieve an even higher level of market share here as we unveil our latest new products.” TTNDY also stressed at the recent interim results call that “every new product that we launch has an accretive gross margin versus products that these things will cannibalize.”
As an indication of the strength of its product pipeline, Techtronic Industries shared at its first-half earnings call that the company expects its number of its MILWAUKEE-branded cordless products to increase by +100% in three years’ time.
The second factor is an improvement in TTNDY’s working capital position next year.
The company’s working capital-to-revenue ratio grew from 18.3% in 1H 2021 to 23.3% for 1H 2022. This is largely driven by an increase in Techtronic Industries’ inventory days from 134 days for fiscal 2021 to 138 days in the first half of 2022. Previously, Techtronic Industries had intentionally kept more inventories as a risk mitigation measure. As the supply chain disruptions ease, TTNDY is expected to reduce its inventory holdings, which will improve its working capital position.
As such, it is reasonable to assume that Techtronic Industries’ 2023 performance should be much better than that for 2H 2022.
Closing Thoughts
I maintain my Buy rating for Techtronic Industries. TTNDY is facing headwinds relating to the US residential market, but this has been sufficiently priced into its valuations. More importantly, I expect Techtronic Industries’ 2023 financial performance to be good, which should be the catalyst to drive its share price up again.
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