Shares of cleaning-equipment manufacturer Tennant Company (NYSE:TNC) are down 11.3% as of 1:50 p.m. EDT, having recovered (somewhat) from an early-morning crash that sent the stock down as much as 13.5%.
This being earnings season, you might expect that an earnings report is to blame -- and you'd be right. This morning, Tennant reported its fiscal second-quarter 2017 financials. Sales were up a healthy 25% over last year's Q2 at $270.8 million, and ahead of the $269 million that analysts had been modeling.
Unfortunately, a big $0.27-per-share pre-tax charge for "acquisition costs related to Tenant's acquisition" of IPC Group, a $0.22 charge for "acquisition-related financing costs," a $0.25 charge for "acquisition-related inventory step-up flow" through, and a final penny-a-share charge "related to a pension plan settlement" reduced earnings by a total of $0.75 per share, and turned what should have been a profitable quarter for Tennant into a $0.15-per-share loss instead.
Admittedly, without all these charges, Tennant would have earned $0.60 per share -- but even this number was below the $0.79 in "pro forma" earnings that Wall Street had been looking for. And that's how a winning revenue quarter turned into an earnings miss.
Investors are selling off Tennant stock in droves, but are they panicking too soon -- or just acknowledging the reality of a bad quarter?
Attempting to allay concerns, management assured analysts that it remains "optimistic about our sales momentum as we head into the second half of 2017." Regardless, Q2's terrible flurry of charges forced management to cut earnings guidance for the full year. While Tennant still believes it can pull down sales of between $960 million and $990 million by year-end, full-year earnings guidance is now being ratcheted back to somewhere between $0.85 and $1.05 per share.
Taken at the midpoint, this means Tennant stock is probably going to end the year costing more than 70 times trailing earnings -- a rich price for a company growing only in the low single digits organically, and depending on acquisitions to provide the bulk of its growth.
While not all Fools will agree with me on this one, I think Tennant stock costs too much -- and investors are right to sell it.