Although the S&P 500 is down 1.4% over the past six months, Tennant’s stock price has fallen further to $84.99, losing shareholders 9% of their capital. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Tennant, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even with the cheaper entry price, we're cautious about Tennant. Here are three reasons why we avoid TNC and a stock we'd rather own.

Why Is Tennant Not Exciting?

As the world’s largest manufacturer of autonomous mobile robots, Tennant (NYSE: TNC) designs, manufactures, and sells cleaning products to various sectors.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Tennant grew its sales at a sluggish 2.5% compounded annual growth rate. This fell short of our benchmarks.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Tennant’s revenue to rise by 3.1%, a deceleration versus its 8.5% annualized growth for the past two years. This projection is underwhelming and suggests its products and services will face some demand challenges.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Tennant’s margin dropped by 5.1 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Tennant’s free cash flow margin for the trailing 12 months was 5.3%.

Final Judgment

Tennant’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 13.5× forward price-to-earnings (or $84.99 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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