TNC's Resilience Amid Tariff Headwinds: Is Now the Time to Buy?

The industrial cleaning solutions sector faces a perfect storm of trade tensions, margin pressures, and shifting demand dynamics. Yet Tennant Company (TNC) has reaffirmed its 2025 guidance despite a 6.8% year-over-year sales drop in Q1, signaling a strategic resolve to navigate these headwinds. For investors, the question is whether TNC’s valuation multiples now offer a compelling entry point to capitalize on its long-term operational flexibility and emerging growth catalysts.

The Tariff Tightrope: Navigating Margin Pressures

TNC’s Q1 results highlight the tension between near-term challenges and structural resilience. While net sales fell to $290 million, management emphasized that order rates surged 13% year-over-year, marking the fourth consecutive quarter of growth above long-term targets. This divergence between orders and sales execution underscores the impact of geopolitical uncertainty and product mix shifts, particularly in regions like APAC, where mid-tier product demand weakened.

The company’s gross margin contracted 280 basis points to 41.4%, driven by reduced high-margin backlog sales in North America and a shift toward lower-margin equipment sales. Yet this is not entirely unexpected: TNC’s Q1 2024 had benefited from a record $50 million backlog reduction focused on premium industrial products. Management’s focus on cost discipline—including a $12.4 million ERP modernization investment and share repurchases—suggests a deliberate strategy to prioritize operational agility over short-term profitability.

Valuation: A Discounted Multiple for a Strategic Turnaround

TNC’s stock price has fallen sharply from its 52-week high of $116.30, trading at $75.34 as of May 15—27.5% below its fair value estimate of $96.03. This discount is reflected in its valuation multiples:

• EV/EBITDA of 8.9x is below historical averages and peers, signaling undervaluation.
• Forward P/E multiples of 10.7x–13.9x contrast with its trailing P/E of 9.8x, suggesting the market has yet to price in recovery potential.

While the PEG ratio of 2.01 suggests overvaluation relative to earnings growth, this metric overlooks the cyclical nature of TNC’s business. The company’s $83.52 real value estimate aligns with its 2025 guidance of $5.70–$6.20 adjusted EPS, implying a low-risk upside if order momentum translates to sustained sales growth.

Catalysts for a Margin Rebound

1. Autonomous Mobile Robot (AMR) Dominance:
   TNC’s AMR sales have surpassed $297 million since 2018, with its X6 ROVR launch (Q2 2025) promising 250% higher cleaning capacity than the X4 model. This product line targets high-margin industrial and warehouse clients, potentially rebalancing the mix toward premium offerings.

2. Trade Policy Resolution:
   While tariffs remain a wildcard, TNC’s guidance assumes it can mitigate costs via pricing adjustments and supply chain optimization. A resolution to trade disputes—particularly with China—could unlock margin expansion in APAC.

3. Order Momentum to Sales Conversion:
   With Q1 orders up 13%, the company’s ability to convert these into full-year sales will determine whether its 2025 net sales guidance of $1.21–$1.25 billion holds.

Risks and Reality Checks

• Economic Sensitivity: TNC’s exposure to discretionary industrial spending leaves it vulnerable to broader economic slowdowns.
• Competitive Pressures: Low-cost manufacturers in Asia could erode pricing power if demand weakens further.
• ERP Integration Risks: The $12.4 million investment in ERP modernization must deliver operational efficiencies to offset near-term costs.

Conclusion: A Buy Signal for Patient Investors

TNC’s Q1 results are a snapshot of short-term turbulence, not long-term failure. The company’s reaffirmed guidance, order growth, and strategic investments in high-margin AMRs position it to rebound once trade dynamics stabilize. At $75.34, the stock trades at a 27.5% discount to its fair value, offering a margin of safety for investors willing to bet on its operational flexibility and innovation.

The question is not whether tariffs and trade wars will persist, but whether TNC can leverage its technological edge to emerge stronger. With AMR sales accelerating and a robust balance sheet ($79.5 million cash, net leverage of 0.66x), now appears the time to buy—before the market catches up to its resilience.