What happened
Shares of cleaning equipment manufacturer Tennant (TNC -1.58%) jumped 11.5% through 11:15 a.m. ET Friday after reporting a sizable earnings beat.
Analysts had forecast Tennant would earn $0.84 per share, adjusted for one-time items, on sales of $272.5 million in its fiscal first quarter 2023. In fact, Tennant earned $1.45 per share (adjusted -- actual income as calculated according to generally accepted accounting principles, or GAAP, was $1.30 per share), and its sales exceeded $305 million.
So what
Sales surged 18.5% year over year despite currency exchange rate headwinds, with increases in volume accounting for about half the growth, and price increases the other half.
GAAP earnings, although perhaps a bit less robust than the non-GAAP adjusted numbers that Wall Street focuses on, nonetheless more than doubled Q1 2022 results. The rise from $0.55 a year ago to $1.30 today marks a 136% increase. What's more, a year ago Tennant was burning cash with negative free cash flow of $15.1 million. In Q1 2023, free cash flow was $24.3 million.
Now what
CEO Dave Huml attributed the strong results to Tennant's efforts to address supply chain shortages and offset rising inflation (i.e., by raising prices -- which, as you'll recall, created half the quarter's sales growth). While supply chains remain tenuous, Tennant said it's still relatively confident about its guidance and doubled down on projections through the end of this year: Sales of $1.1 billion or better will represent growth of 3% to 7%. Adjusted earnings will range from $3.70 to $4.50 per share.
Admittedly, that's not a GAAP figure. Also, Tennant's numbers suggest both a slowdown in sales growth later this year and the fact that Tennant continuing to earn $1.45 per quarter (or even $1.30) probably isn't realistic.
For the time being, however, investors seem OK with that. At a valuation of about 17.2 times trailing earnings, they must think Tennant stock is cheap enough to buy even if Q1's sizable earnings beat is only a one-off event.
