October 21, 2020 - 12:23pm EST by
2020 2021
Price: 0.78 EPS -0.40 -0.13
Shares Out. (in M): 38 P/E NA NA
Market Cap (in $M): 30 P/FCF NA NA
Net Debt (in $M): -18 EBIT -10 -6
TEV (in $M): 12 TEV/EBIT NA NA

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  1. ToughBuilt Industries (TBLT) essentially is a publicly traded growth-stage startup, whose stock has underperformed during its rollercoaster ride to complete the “zero to 1” phase.  It trades at a EV/sales CY21E of 0.3X despite an expected 52% topline CAGR from CY19 to CY21, an extreme discount vis-à-vis profitless consumer stocks with similar sales growth (peer average is 2.7X).  Just getting to 1.0X sales implies a $1.60 stock for over 2X upside.


  2. Its strong second quarter earnings report suggests that the company has entered the “one to ten” phase with early success of e-commerce with Amazon and new distribution channels with partners Lowe’s and Tractor Supply.

  3. Near term catalyst: both the common stock and warrants (TBLTW) could get a significant boost from the quarterly Amazon sales update in the next week or so and the 3Q20 earnings report in mid-November.

  4. TBLTW may enjoy an additional boost if TBLT decides to revamp its cap table via an exchange offer to consolidate the different tranches of outstanding warrants.

Investment Thesis

ToughBuilt Industries, Inc. (TBLT), founded in 2012, designs, develops, manufactures, and distributes home improvement and construction products, with offerings including tool belts, utility pouches and knee pads. TBLT offers its products under the TOUGHBUILT brand name through various home improvement big box stores, online platforms, professional outlets, and direct marketing to construction companies and trade/wholesale outlets. The company’s business model is similar to that of Nike or Apple, i.e. the U.S. team focuses on design, marketing and distribution while outsourcing the manufacturing to suppliers overseas, primarily in China. The home improvement market has huge growth potential, in the U.S. alone, the market is over $350 billion with over 4 million contractors.

The stock of TBLT has underperformed since its IPO in November 2018 primarily due to the dilution overhang of the follow-up equity offering to fund the business growth. From a business lifecycle perspective, TBLT is similar to a startup in that it just completed its “zero to one” phase as a publicly traded company. 2020 seems to be a turning point as it established both on line and offline distribution channels and sales have ramped up both domestically and internationally. The stars have aligned for a long-awaited rally as the company enters the phase of from one to ten. TBLT is like a venture capital investment but in the public market, offering investors significant upside over time but with meaningful volatility in the near term.

TBLT Price History

Source: Bloomberg.

Our investment thesis is built on several drivers and catalysts that TBLT may benefit from both near term and longer term:

  1. Cheap valuation. With an enterprise value of only $13M the stock trades at an EV/sales ‘20E of less than 0.5X and EV/sales ‘21E of less than 0.3X per consensus (Maxim) with sales expected to grow from $19M in 2019 to $28M in ‘20E (+47%) and $44M in ‘21E (+58%).  While the closest comp is SWK, it is not a good proxy as sales are only growing at low-to-mid single digits.  Still, it trades at an EV/sales ‘20E of 2.4X.  As shown in the chart below, a basket of consumer stocks growing sales at a greater than 20% CAGR for ’20 and ’21 and negative EPS, like TBLT, trades at an average EV/sales ‘CY21E of 2.7X.  At that valuation, TBLT would trade at above $3.50  (up about 4.5X). 
  2. Strong liquidity. The company had over $19 million in cash on the balance sheet at the end of second quarter 2020. With the current annual cash burn rate of $13 million, the cash balance and the future operating cash flow should at least cover the cash need for the next 12-18 months before the company becomes self-funded.
  3. High profile online and offline distribution partnerships. TBLT has developed both its online and offline distribution channels with high profile retailers, including Amazon, Lowe’s and Tractor Supply etc. TBLT has showed strong momentum in scaling up its sales with these channels during the first half of 2020. With the tailwind from COVID-19, we expect this positive trend to continue into the third quarter and the rest of the year.
  4. Global expansion. While all eyes are on TBLT’s sales momentum on, its potential overseas is somewhat overlooked. Per the company’s latest 10Q, TBLT generated 32% of its sales from outside the U.S. during the first half of 2020, with the top three overseas markets being South Korea (9%). Canada (7%) and Australia (6%). Potentially TBLT could have significant growth also in emerging markets, such as South America and Asia as the distribution cost could be much lower than the U.S. It is worth noting that on TBLT’s Amazon storefront, there are quite a few positive reviews in Spanish from Latin America which seems to suggest a growing brand awareness in that market.
  5. Well-defined catalysts.  TBLT has disclosed its quarterly sales on in the U.S. and Canada one or two weeks after the quarter end (well before the earnings release). So we should expect TBLT to provide this sales update within a week or so. TBLT will announce its third quarter earnings on November 19th, 2020 which should provide a lot more detail about its distribution channel results. Both announcements could be significant catalysts for a stock rally.
  6. COVID-19 beneficiary.  The pandemic has provided an unprecedented tailwind for the home improvement and construction industry.  Mandatory lockdowns, social distancing and work from home have significantly boosted the home improvement sectors during 2020 so far.  The tailwind is spread across the industry’s supply chain, including tool manufacturers, strong retailers and troubled retailers. 


Stock Charts

Using the stock price charts below as an indication, the rally broad-based (except TBLT), e.g. power tools maker Stanley Black & Decker (SWK), the homebuilders ETF (ITB), strong online and offline retailers Wayfair (W), Home Depot (HD) and Lowe’s (LOW), and once troubled retailers, Bed Bath & Beyond (BBBY) and Tuesday Morning Corp (TUESQ) have all run. 

TBLT vs Stanley Black & Decker, Inc. (SWK) Price Chart

Source: Bloomberg.

Homebuilders ETF ITB vs S&P 500 ETF (SPY)

Source: Bloomberg.

 Home Depot, Wayfair and Lowe’s Price Chart

Source: Bloomberg.

Bed Bath & Beyond and Tuesday Morning Corp Price Chart

Source: Bloomberg. 

TUESQ is a great example - it filed for bankruptcy right after the outbreak of COVID-19, but the equity bounced back and is in the money due to better than expected sales.

Both online and offline channels have started to bear fruit as sales have been showing strong and sustainable momentum.

TBLT’s storefront with is a key driver this year, reporting $5.4 million on annualized basis in the second quarter 2020. Its third quarter sales from the Amazon storefront could be even stronger as April and May were still negatively affected by COVID-19.

Screenshot of TBLT’s Amazon storefront