JARAMA
JARAMA
Shares of Vontier (NYSE:VNT) have seen a real rally in recent weeks, as the company guided for growth in 2024. Multi-year headwinds are disappearing, revealing the true organic growth rate and potential of the business.
While shares have seen a nice re-rating already, this secular growth company still trades at non-demanding multiples, leaving the door open for further share price gains. While having owned shares for a long time, at much lower levels, I am cautious to take profits too early here, as the set-up still looks quite decent.
The paragraph header is basically what Vontier is about, being a leader in the mobility ecosystem. The company organizes its business across three segments and came into its existence when its former parent company Fortive (FTV) spun off the firm in the fall of 2020.
The largest of these segments is the environmental & fueling solutions business, which is responsible for nearly half of sales. This business supplies fueling equipment & technologies, alternative energy dispensers, sensing & monitoring solutions, and related services.
The mobility technologies business is responsible for just over a third of sales, with revenues generated from car wash management software, point-of-sale software, fleet telematics, refueling systems and EV charging equipment.
The smallest division is the repair solutions business, responsible for a fifth of sales with these revenues derived from diagnostics & scan tools, power tools, tools storage, and EV & battery repair tools.
Despite the sound positioning towards long-term megatrends such as mobility technologies and alternative and renewable energy solutions, the company has failed to deliver on growth in 2023.
The company recently posted its 2023 results, with full-year sales down nearly 3% to $3.10 billion. Fourth quarter revenues were reported down by nearly 10% to $789 million. Core sales declines for the fourth quarter were down 5%. The declines were attributable to a 20% drop in the environmental & fueling solutions, which is due to declines in co-called EMV-related sales.
To shed some more light on this headwind: Vontier benefited from the concluding phase of the EMV payment standard adoption (Eurocard, Mastercard, and Visa standard), but with adoption completed in 2023, it saw tough comparables versus previous periods. Note that this did not just create a headwind in 2023, but actually in the two preceding years as well.
Despite the lack of growth, the company remains very profitable as the company posted GAAP operating profits of $543 million last year, even after an $81 million amortization charge related to intangible assets.
Adjusted for this and some other items, net earnings came in at $450 million, with adjusted earnings down nineteen cents to $2.89 per share, after these earnings topped the $3 mark in 2022. While the adjustments exclude various charges, these are mostly related to amortization charges and smaller restructuring and transaction-related costs, but at least not stock-based compensation expenses. For this reason, I am happy to accept these adjustments and thus use the adjusted earnings in the analysis.
A $30 stock around the time of the spin-off late in 2020 looked to be a fair to cheap valuation. In fact, when I covered shares a year later, I pegged pro forma earnings power around $2.50 per share, for a non-demanding 12 times earnings multiple. The thesis changed a bit as the company announced a $965 million deal for point of sale and workflow software provider DRB Systems in the summer of 2021.
At such valuations, shares traded at very compelling multiples and in fact earnings power improved to $3 per share in 2022, yet shares actually fell to the higher-teens that year, only pushing down expectations further. Amidst a tougher 2023, as discussed above, shares actually rallied to levels in the mid-thirties recently, and in fact, rallied to a high of $41 in recent trading sessions.
This share price momentum followed a lackluster 2023, as the 2024 guidance calls for growth, yet modest growth. Adjusted earnings per share are seen between $3.00 and $3.15 per share, up 4-9% from a softer 2023. This is based on a sales number estimated between $3.05 and $3.11 billion, marking 4-6% core sales growth from 2023. Based on this outlook, shares look very reasonably priced at 13-14 times adjusted earnings. Net debt of nearly $2.0 billion works down to a 2.8 times leverage ratio based on $709 million in adjusted EBITDA.
Leverage will improve in a minor fashion, as Vontier announced the sale of its Coats business to Victor Capital Partners in a $72 million cash deal in January. With $110 million in sales and $10 million in EBITDA leaving the door, the company will see a small decline in the reported results, with these activities being divested at non-demanding multiples, but the sale is too small to really impact the investment thesis.
The truth is that I am a bit puzzled. Shares had gotten cheap to an unheard level in 2022 when I added to a long position which I initiated at the time of the spin-off. Yet, I was surprised to see the strong momentum in recent weeks. This comes amidst a reasonable outlook, calling for modest growth in 2024, sufficient to create enthusiasm amidst non-demanding valuations.
In fact, I am a bit surprised to see the shares perform so well. On top of the resilient guidance, the company announced a mere $0.025 per share quarterly dividend, as in fact the company announced a mixed shelf offering following the results as well.
Nonetheless, it might be the realization of the market that EMV headwinds are ending, as the solid positioning now should really result in reported sales growth from here onwards. This drives the real potential for valuation multiple re-rating, as even after a recent move higher, current valuations look not too demanding.
Hence, I find myself at a crossroad. Having averaged down before, I am left with a more than full position, certainly after a recent rally in the shares. This makes it tempting to sell the shares. On the other hand, the realization that EMV headwinds are disappearing, and overall valuations are still non-demanding, makes me cautious to take profits too early, as I will only start trimming in the higher forties here.