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Elevator Pitch
My Buy rating for Techtronic Industries Company Limited’s (OTCPK:TTNDY) [669:HK] shares stays unchanged.
I discussed about Techtronic Industries’ 2023 outlook and its valuations in my earlier article for TTNDY published on November 1, 2022.
With this current write-up, I highlight data supporting Techtronic Industries’ market leadership, and find that expectations of further market share gains for the company are pretty realistic. This validates my decision to stick with a Buy investment rating for Techtronic Industries.
Global Market Leadership
Data on the outdoor power equipment and electric power tool industries is typically hard to find, as there aren’t any research firms tracking and reporting such data on a regular basis. A Chinese company known as Chervon Holdings [2285:HK] filed for a public listing on the Hong Kong Stock Exchange in 2021, and it commissioned Frost & Sullivan to undertake research on the electric power tool and outdoor power equipment segments. As indicated in this industry research report issued by Frost & Sullivan in late 2021, TTNDY is the leading player in the worldwide outdoor power equipment and electric power tool markets.
In the Frost & Sullivan report, the research firm refers to Techtronic Industries as “Company A.”
Based on findings outlined in this report, Techtronic Industries boasted a 20.4% market share (in terms of revenue) of the outdoor power equipment market for 2020. In contrast, Stanley Black & Decker, Inc. (SWK)’s, referred to as “Company C” in the report, share of the global outdoor power equipment industry was just a mere 10.4% in 2020. Also, Techtronic Industries’ flagship RYOBI brand was the most popular outdoor power equipment brand in the world with a market share of 16.3%, while the SWK’s DEWALT brand boasted a relatively lower market shares of 8.8%, respectively.
TTNDY is also the largest player in the worldwide electric power tool product segment. Techtronic Industries had a 16.6% share of the electric power tool market in 2020, while the market shares for its listed peers, Stanley Black & Decker and Makita Corporation (OTC:MKTAY) (OTCPK:MKEWF) [6586:JP] (referred to as “Company D” in the report) were lower at 14.9% and 6.9%, respectively in the same period.
Market Share Gains
Frost & Sullivan has yet to publish any updates to its earlier report on the electric power tool and outdoor power equipment markets which was based on 2020 data. But it is reasonable to assume that Techtronic Industries had gained market share at the expense of its competitors in 2021.
According to S&P Capital IQ’s historical financial data, Techtronic Industries’ top line expanded by +34.6% in full-year fiscal 2021. As a comparison, Makita Corporation and Stanley Black & Decker’s revenue increased by only +23.5% and +19.6%, respectively for 2021.
The consensus financial forecasts taken from S&P Capital IQ suggest that TTNDY should continue to grab market share away from its key rivals in the coming years. Techtronic Industries’ consensus 2022-2024 revenue CAGR of +7.4% is much higher than Makita Corporation’s and Stanley Black & Decker’s top line CAGRs of +4.0% and +2.8%, respectively over the same period.
At its earlier 1H 2022 earnings briefing in August last year, Techtronic Industries had stressed that there is “vast potential” for the company “to capture more market share to outgrow our competitors.” Specifically, TTNDY highlighted that “new products” slated for ‘launch in the back half (of 2022) and throughout 2023″ as the key drivers of market share gains for its MILWAUKEE brand which produces power tools targeted at professionals.
Two specific metrics explain why TTNDY has been more successful than its peers in coming up with new products to grow its market share.
Based on financial data obtained from S&P Capital IQ, Techtronic Industries allocated 3.3% of its revenue to research & development spending for the trailing twelve months’ financial period. In comparison, the trailing twelve months’ research & development costs-to-sales ratios for Makita Corporation and Stanley Black & Decker were lower at 1.9% and 1.6%, respectively.
Another key metric to pay attention to is gross profit margin. The 2021 gross profit margins for Techtronic Industries, Stanley Black & Decker and Makita Corporation were 38.8%, 33.5% and 33.4%, respectively.
In other words, a virtuous cycle is at play here. TTNDY is more willingly to invest in research & development as compared to its peers, and this in turn allows Techtronic Industries to launch new products which are priced higher and carry better gross margins. As a result, Techtronic Industries has greater capacity for reinvestment as a result of superior gross margins, which enables it to be more willing to commit to a more substantial amount of research & development investments.
Attractive Valuations
Techtronic Industries’ current valuations are reasonably attractive.
The stock is currently valued by the market at 19.0 times consensus forward next twelve months’ normalized P/E according to valuation data taken from S&P Capital IQ. There is room for Techtronic Industries’ share price to rise if its valuations revert to their historical mean. As a comparison, the stock’s three-year and five-year average forward P/E ratios are higher at 25.2 times and 22.7 times, respectively.
Also, Techtronic Industries has an impressive financial track record of having delivered ROEs above 15% for every single year since 2016; the company last achieved an ROE of 25.5% for full year fiscal 2021. I expect Techtronic Industries to maintain a yearly ROE of at least 22% in the next few years, based on expectations of market share gains and higher gross margins driven by new products. As such, Techtronic Industries should deserve to trade at a forward P/E multiple in the low-to-mid twenties in my opinion, which implies that the stock is currently undervalued.
Concerns Are Overdone
Certain investors are worried about the downside risks for Techtronic Industries relating to a recession and property market weakness.
In my opinion, the market’s concerns are overdone for three key reasons. Firstly, the sales of Techtronic Industries’ professional tools should be relatively resilient as their demand is more correlated with infrastructure build-out rather than home sales. Secondly, new product launches and market share gains can partially offset economic headwinds to some extent. Thirdly, the negatives are already reflected in Techtronic Industries’ share price, given that its current P/E multiple is below historical averages.
Concluding Thoughts
I still rate Techtronic Industries as a Buy. My research leads me to the conclusion that TTNDY dominates the markets in which it operates in, and it is likely to enjoy further market share gains going forward.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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