Techtronic Hammered by Double-Blow from Receding Pandemic, Short Seller Attack

The maker of Milwaukee and Ryobi power tools’ revenue began to contract in the second half of last year, reversing two years of strong growth at the height of the pandemic

Key Takeaways:

• Techtronic’s revenue fell 8.7% in the second half of last year, while its profit fell by an even larger 13.2%
• The power tool maker’s stock is down 20% since a short seller attack a week ago, and has lost more than half of its value from a peak in August 2021

By Doug Young

Call it a post-Covid hangover. That’s what power tool makers have been feeling for the last half year, following a two-year boom fueled by strong demand from people doing home improvements during long periods stuck at home during the pandemic.

Local powerhouse Techtronic Industries Co. Ltd. (0669.HK) is feeling the pain more acutely than its peers, following a short seller attack last week that shaved a quarter off its market value. A week later, the company has just released its latest financial results that won’t do much to cheer investors still leery of any doubts created by the attack from Jehoshaphat Research.

Those results show that Techtronic, whose mainstays are the Milwaukee and Ryobi power tool brands, slipped into both revenue and profit contraction in the second half of last year. The company did very little to explain why that happened, nor did it give any meaningful outlook for a coming year that looks full of uncertainty.

Investors seemed not to mind too much, with the company’s Hong Kong stock up about 2% in early Thursday trade after the results came out. That built on a 0.6% Wednesday gain for the company’s more thinly traded American depositary receipts (ADRs).

But the stock has taken a beating since the short-seller attack, and was still down about 20% from pre-attack levels at Wednesday’s close, shaving off about HK$30 billion ($3.8 billion) in market value. Trading volume has been way above average the entire past week, up by five times or more from its usual levels, indicating many people are probably unloading the stock after profiting from the company’s strong gains during the pandemic.

At its current levels, the stock has lost more than half of its value from a peak in August 2021.

We won’t go into the short seller’s report here, but are providing a link to it for anyone who wants to check out its allegations of inflated profits achieved for more than a decade through the use of “manipulative accounting.” Likewise, we’re providing a link to the company’s routine response saying the short seller doesn’t know what it’s talking about.

Having said all that, we’ll move on to the company’s newly released annual report, which shows it is in very real danger of ending its streak of annual revenue growth every year dating back to at least 2019. The company managed to keep that streak alive by posting 0.4% revenue growth last year to $13.3 billion. But a subtraction of the company’s first-half revenue from the full-year figure shows Techtronic’s revenue actually fell by 8.7% in the second half of the year.

That decline doesn’t come as a huge shock, since the company’s revenue growth was already falling steadily before that, from 52% in the first half of 2021 to just 10% in the first half of this year. Analysts expect the company’s revenue to return to growth of about 6% this year, according to the average of 14 polled by Yahoo Finance. But it’s quite possible they could revise down their outlook following the release of this latest report.

Declining DIY business

A deeper dive into the company’s report shows that declining business from do-it-yourselfers was the main force behind the gloomy revenue picture. The company’s Milwaukee brand, which is more favored by professionals, actually posted an 18.7% sales increase last year from 2021 levels.

But its Ryobi brand, which is geared toward do-it-yourselfers, saw its sales decline last year by a mid-single digit percentage, the company said. It added that even after that decline, Ryobi sales last year were still nearly 50% higher than pre-pandemic levels in 2019, showing the brand could suffer more declines this year as the pandemic continues to recede.

The company did a relatively good job of controlling its costs, with operating expenses up by just 2% for the year. Similarly, it trimmed its capital spending for the year to $581 million from $747 million in 2021. As a result, it was able to improve its gross margin to 39.3% from 38.8% in 2021.

Despite the cost controls, the company’s profit fell 2% for the year to $1.08 billion, and was down by an even sharper 13.2% in the second half of the year, probably due to higher financing costs.

The company provided very little discussion of the past year, and said almost nothing about the second half when its situation appeared to deteriorate rapidly. But rival power tool maker Stanley Black & Decker (SWK.US) was showing similar stress in its fourth-quarter report released a month ago, including flat revenue for the three-month period and a swing into the loss column from a year-ago profit.

Stanley Black & Decker also didn’t comment too much on the deteriorating environment at the end of last year, though it did note it was trying to sell down inventory as it entered 2023 “prepared for a challenging demand environment.”

One other interesting note from Techtronic’s report came in its discussion of geographical diversification for its manufacturing. Like many other brands, the company realized the perils of relying too much on China as a manufacturing base during the pandemic. As a result, it said has moved ahead by diversifying its base to Vietnam, and also to both Mexico and even the U.S. to service its North American business that accounts for about three-quarters of its sales.

From a valuation perspective, Techtronic still looks relatively strong among its peers with a price-to-earnings (P/E) ratio of 16. That’s roughly the same as the 17 for DIY retailer Home Depot (HD.US) and quite a bit stronger than the 10 for smaller Hong Kong-listed Johnson Electric (0179.HK).

At the end of the day, this entire group of companies was one of the few to thrive during the pandemic due to their unique position catering to the home improvement market. With the pandemic now increasingly in the rear-view mirror, it’s only natural that they should return to their earlier business and valuation levels.

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