Techtronic Industries: Good Reasons To Stay Positive

seekingalpha06-23

My view of Techtronic Industries' leadership transition, the company's share repurchases, and the prospects of rate cuts is favorable.Techtronic Industries' P/E multiple can re-rate to a level closer ...

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RossHelen/iStock via Getty Images Elevator Pitch My investment rating for Techtronic Industries Company Limited (OTCQX:TTNDY) (OTCQX:TTNDF) [669:HK] is a Buy.  With my prior April 8, 2024 article, I drew attention to the management commentary provided by Techtronic Industries' peer and a major M&A deal for its key client. The current update highlights a number of reasons to remain bullish on the stock.  I have a favorable opinion of Techtronic Industries' new CEO appointment, the company's share buybacks, and the interest rate outlook. Taking into consideration the multiple reasons to stay positive on TTNDY, I continue to rate the stock as a Buy.  Investors should be aware that Techtronic Industries' shares can be traded on the Stock Exchange of Hong Kong and the Over-The-Counter market. The mean daily trading values for the company's OTC shares and Hong Kong shares were $2.5 million and $50 million (source: S&P Capital IQ), respectively for the last 10 trading days. Readers can consider US brokerages like Interactive Brokers and Hong Kong stock brokers such as Monex Boom Securities if they wish to deal in Techtronic Industries' relatively more liquid Hong Kong-listed shares. New CEO  In late May this year, Techtronic Industries issued an announcement revealing that Steven Richman will be the company's new CEO replacing Joseph Galli who has made a \"personal decision to retire.\" I am pleased that the new CEO for Techtronic Industries is a long-tenured insider with relevant industry experience and a good track record. All else equal, there tends to be a higher probability of leadership transition issues when a hired hand that is new to the company or industry takes over at the top. It is reassuring to know that TTNDY hasn't taken this route. According to the company's May 2024 new CEO appointment announcement, Steven Richman has been working at Techtronic Industries for 17 years, and he boasts over three decades of experience in \"the management of industrial, electrical, plumbing, and retail distribution operations.\" Also, it is worth noting that Steven Richman has served as the President of TTNDY's professional power tool business (known as Milwaukee) since the beginning of 2007. The company's Milwaukee business has achieved an impressive \"double digit\" top line CAGR for the 2007-2023 time frame when Steven Richman was at the helm as revealed in the May 2024 announcement.  Share Buybacks Techtronic Industries' most recent share buyback was the repurchase of 250,000 of its Hong Kong-listed shares at an average price of HK$94.13 on June 20, 2024. In 2024 year-to-date, the company has spent close to HK$217 million on share repurchases, of which HK$173 million of buybacks were done in the past one month starting on May 21. There are favorable takeaways from the company's share repurchases. A key takeaway is that the company has been opportunistic in timing its share buybacks.  As highlighted above, 80% of Techtronic Industries' share repurchases (in terms of the amount spent) was done in the last one month beginning on May 21, 2024. The company's Hong Kong-listed shares declined by -12% from its 52-week peak of HK$116.10 (intra-day high) as of May 14, 2024 to HK$102.60 at the end of the May 21, 2024 trading day before correcting further by another -10% to HK$92.10 as of June 21. In other words, the company has taken advantage of the weakness in its stock price to step up on share buybacks, rather than repurchase its shares in a systematic manner without regards for price or value. The other key takeaway is that Techtronic Industries' overall shareholder yield (sum of buybacks and dividends divided by market capitalization) will be boosted by its share repurchases.  Techtronic Industries' consensus forward FY 2024, FY 2025, and FY 2026 dividend yields are 2.2%, 2.6%, and 3.2%, respectively as per S&P Capital IQ data. The amount of monies that the company spent on buybacks in 2024 year-to-date is equivalent to 0.13% of the stock's market capitalization, which translates into an annualized buyback yield of 0.26% for the full year.  As such, the stock's potential FY 2024 shareholder yield could be a better 2.5%, as opposed to 2.2% (dividend yield alone) in the absence of buybacks.  Potential Rate Cut A potential rate cut is on the cards judging by recent developments and news flow. Seeking Alpha News recently reported on June 20, 2024 that a rise in \"gold and silver prices\" indicates that \"market watchers increasingly believe U.S. economic data showing signs of a slowdown raises the likelihood for Federal Reserve interest rate cuts later this year.\" An earlier June 18, 2024 Seeking Alpha News article cited Richmond Federal Reserve President Tom Barkin's comments that \"the latest inflation reading has been very encouraging.\" Another Seeking Alpha News write-up on June 18 highlighted Federal Reserve Bank of New York president John Williams' views that \"inflation is coming back to the Fed's 2% target.\"  Lower interest rates will most probably have a positive impact on Techtronic Industries' future financial performance. One positive effect is a decrease in interest costs for TTNDY. The company previously shared at its FY 2023 analyst call in March this year that \"floating rate debt\", which are mainly \"higher cost short-term borrowings\", represented 40% of its aggregate borrowings. Therefore, Techtronic Industries' future earnings might surpass expectations, if the company's interest expenses decrease to a larger-than-expected extent as a result of rate cuts. Another positive effect is the increase in demand for Techtronic Industries' power tools and outdoor power equipment in the event that interest rates go lower. Home Depot (HD), TTNDY's key customer, acknowledged at its most recent Q1 2024 earnings briefing that elevated rates \"weigh on the mind of customers\" and have a negative impact on \"housing turnover related spend\" and \"all large projects.\" It will be realistic to think that a rate cut will boost spending on TTNDY's product offerings. Variant View Certain risk factors are worthy of attention. Firstly, Techtronic Industries' business performance might suffer if there are hiccups with the leadership transition. Secondly, the company could disappoint investors, if it fails to maintain a good balance between capital investment (i.e. capital expenditures, M&A) and capital return (i.e. dividends, buybacks) Thirdly, a delay in rate cuts might lead to slower-than-expected revenue and higher-than-expected interest expenses for TTNDY. Closing Thoughts Based on historical valuation data sourced from S&P Capital IQ, Techtronic Industries' shares used to command a similar or higher forward P/E multiple than its key client Home Depot between 2018 and 2022. But Techtronic Industries' current consensus next twelve months' normalized P/E of 19 times is lower than HD's consensus forward P/E of 23 times now. I believe that Techtronic Industries' valuation gap with Home Depot will narrow and eventually close, as investors have a better appreciation of the new CEO's ability and the company's shareholder capital return strategy in time to come. Also, a rate cut will benefit both TTNDY and HD as mentioned earlier, and the valuation multiples of both stocks are also likely to expand going forward. In conclusion, I think that TTNDY is worthy of a Buy rating.  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.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445054972"}