Techtronic Industries: Unknown ADR Worth A Second Look

By Will Ashworth | July 10, 2013 AAA

Nashville's Tennessean newspaper reported July 9 that Hong Kong-based Techtronic Industries (OTC:TTNDY) had successfully purchased the assets of Oreck Corporation out of bankruptcy. Beating out an earlier bid from the Oreck family itself, who sold the company in 2003 to a private equity firm, Techtronic's three divisions make it a very attractive investment. This is one ADR worth a second look.

Private Equity Drops The Ball
David Oreck founded Oreck in 1963 manufacturing upright vacuum cleaners for the U.S. hotel industry. From their it branched out to middle-aged housewives who could afford the vacuums, which weren't cheap. Offering a quality product with an impressive 21-year warranty, Oreck grew very rapidly until Oreck decided to sell the family business in 2003 to American Securities, a leading middle-market private equity firm. At age 80, Oreck thought he was leaving the business in good hands. Instead, American Securities took a profitable, growing business, with no debt, and sucked the life out of it. A decade later and Oreck tried to buy back his baby but was ultimately beaten to the punch by Techtronic's subsidiary, Royal Appliance, which also owns Hoover and Dirt Devil vacuums. Oreck's loss, fortunately or unfortunately, depending on how you look at it, is Techtronic's gain.

SEE: ADR Basics: What Is An ADR?

Who is Techtronic Industries?
As I mentioned previously, it's a Hong-Kong company with three operating segments: Floor Care, Outdoor Products, and Power Tools & Accessories. In addition to the Hoover and Dirt Devil brands, it owns the Milwaukee, AEG and Ryobi power tool brands. Now I'm not the handiest guy in the world but even I've heard of all of these brands. In 2012, the company generated $3.85 billion in revenue with $260 million in operating income. Year-over-year sales increased 5.1%, gross margins by 90 basis points, operating income by 18.6% and net profits by 32.2%. In terms of its balance sheet, it's reduced its net-debt-to-equity from 73% on 2010 to 26% in 2012. Part of the reason for the lower debt-to-equity ratio is its free cash flow position has improved by $304 million over the last two years enabling it to pay off some debt.

In terms of its overall business, 73% of its revenue in 2012 was generated in North America. More importantly, its North American revenue increased by 6%, 340 basis points higher than in the rest of the world. Its power tool segment has taken market share in both Canada and the U.S. in each of the last four years as it's Ryobi lithium ion cordless products have generated good sell through with its customers. Another of its growth plans is to transform the floor care segment of its business, which accounts for 26% of its overall revenue, into an innovation machine. Clearly, the Oreck purchase helps move it in that direction. CEO Joe Galli, who joined the company in 2006 with an impressive resume including executive stints at Stanley Black & Decker (NYSE:SWK), Newell Rubbermaid (NYSE:NWL) and Amazon (Nasdaq:AMZN), has embarked on a strategic plan entitled, "Powerful Brands, Innovative Products, Operational Excellence and Exceptional People." This is definitely a company on a mission.

SEE: The Value Investor's Handbook

Why You Should Care?
This is a company operating at the top of its game and looking to improve upon that performance. Since Joe Galli became CEO in February 2008, its stock is up 137% compared to 35% for the SPDR S&P 500 (NYSEARCA:SPY). It doesn't matter what period you look at, Techtronic's outperformed both the index and its peers. Year-to-date it's up 31.6% compared to 21.1% for Makita (OTC:MKTAY) and 10.3% for Stanley Black & Decker, Joe Galli's former employer.

Bottom Line
Rarely do I come across a company I view as flawless but Techtronic is pretty darn close. Its two founders, Horst Julius Pudwill and Professor Roy Chi Ping Chung, own 27% of its stock and appear firmly in control with a quality hired-gun to boot who's only 54 years of age and should be around for a while. If power tools are your thing, this is one ADR you definitely shouldn't overlook. It's a stock for the long run.

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