The famous Benjamin Graham once said that a market is a short-term voting machine and a long-term weighing machine. This does not seem to be the case with Vontier (NYSE: VNT) Again. The mobility conglomerate is struggling to get investors to believe in its growth trajectory and has been “rewarded” with negative price movement since its spin-off from Fortive in May 2020.
If you think fundamentals drive price long-term, like me, then Vontier is currently a bargain, trading well below intrinsic value. While I see the value attractive, I would probably wait for a catalyst to support the price and see the evolution of debt, capital allocation and the real impact of EMV revenue erosion.
Vontier separates its operating segments into 1. mobility technologies and 2. diagnostic and repair tools, with the former reaching over 75% of 2021 revenue and the latter the remaining 25%. Total turnover for the last reporting quarter (Q2) were $776 million, operating margin (adjusted) was 21.5% and diluted earnings per share (adjusted) were $0.72 – all up year over year. ‘other.
Mobility Technologies incorporates, among other smaller companies, the well-known Gilbarco Veeder-Root, Integrated Fuel Dispensing and the newly acquired DRB which focuses on integrated solutions in the car wash industry. Other sources of revenue come from technology services related to mobility, such as vehicle tracking and fleet management. The company is primarily focused on North American markets with 71% of its revenue, but is also exposed to some high growth markets in developing countries and Western Europe.
The diagnostic and repair tools segment includes Matco Tools and Hennessy Industries which offer a wide variety of repair tools and equipment also for vehicles, complementing the mobility segment above.
The company promotes its proprietary “Vontier Business System (VBS)” which it says drives its performance and corporate culture, resulting in “long-term shareholder value creation” through loose application of a series of tools and processes. A similar system exists in previous Fortive parent companies (FST) and Danaher (HRD) with similar explanations. Looking at the past 3 years, then only Danaher has managed to deliver the much-promised shareholder returns while the other two have lagged behind in the overall market.
I think Vontier has several interesting little “moats” in some of the segments in which it operates. They have strong and dominant market positions that are difficult for competitors to penetrate.
Developments: spin-off to today
Since the spin-off in May 2020, Vontier has been trying to capitalize on the short-term revenue boost caused by the EMV Transition tailwinds with capital allocation directed towards growth acquisitions and some buyouts. This strategy seems to be working as we were presented with good non-EMV growth and some interesting acquisitions; Drivez and tritirium (DCFC) in the field of electric charging software and hardware, New-Zealand Invento to strengthen its payment solutions, and the largest, already mentioned, DRB spatial position of integrated vehicle washing solutions. In addition to other possible synergies from the acquisitions, there should be attractive growth opportunities for DRB internationally to take advantage of existing connections and synergies from the dominant refueling business.
The company has accumulated significant debt on its balance sheet ($2.6 billion), including $1 billion at floating rates to be repaid $600 million in 2023 and $400 million in 2024. This will require, at best cases, new financing at a cost probably higher than what they currently have. In the worst case, Vontier will not be able to sign additional lines to service his debt and is forced to take serious action, such as selling parts of the business.
The past balance sheet is positive with good results, the company has successfully beaten earnings estimates since the split took place.
What seemed like an opportunity to pivot the company to growth, the forced EMV transition turned into a headwind with investors having different opinions regarding near-term impact and future growth. It also didn’t help that direction disclosed a steeper decline in revenue is already occurring in 2023 instead of a slow decline through 2025. Even with a steeper decline and negative analyst estimates, management is reinforcing belief in growth for 2023.
It is worth highlighting the recent change of financial director with the replacement of David Naemura by the former financial director of Harsco (CSS), Anshooman Aga. In my opinion, changes in direction, especially those without a reason, are a red flag to consider. It also adds that Harsco doesn’t seem to be doing too well after a major acquisition.
Given single-digit free cash flow growth and a 10% discount rate after 2023, I think Vontier’s fair value is, at least, in the high 20s. I consider it fair and prudent to assume a US GDP growth rate for their growth after the 2023 EMV headwind and a 10% discount rate even with rising interest rates. It is still a stable, low-cyclical, cash-positive business with impressive evolving gross margins and recurring revenue. The fuel business, although threatened in the future, is not going away anytime soon and is still capable of producing attractive returns.
If we then consider a relative valuation, the difference is even more overwhelming. Vontier is currently trading at an EV/EBIT (FWD) of 7.60 and a Price/FCF (FWD) of 5.66 while Fortive is trading at an EV/EBIT (FWD) of 25.46 and a Price/FCF (FWD) of 17.71, Dover (DVV) is trading at an EV/EBIT (FWD) of 13.23 and a Price/FCF (YOUR) by 1:35 p.m. and Danaher is trading at EV/EBIT (YOUR) of 26.33 and a Price/FCF (YOUR) of 22.16. With just a change in future expectations and trading multiples, it is possible to see a 2x in Vontier’s price.
Bear cases and risks to consider
In the short term, I think the bearish case could materialize if they fail to overcome the drop in revenue and earnings for next year, failing their projections for next year. This should prove further decline in share prices and new doubts about their ability to perform. The huge amount of debt will likely be harder to repay and maintain despite a high interest coverage ratio, but it will be hard to grow through acquisitions if you don’t have any financial flexibility. Renewing debt due in 2023 and 2024 will be more difficult and more expensive. In the long term, the transition from refueling systems to electric charging hardware and software will prove essential to ensuring a secure future. Although still a long way off, it is certain that fossil fuel vehicles will eventually die out and so Vontier needs to start building the (correct) foundations.
It’s amazing how low Vontier’s stock price has been since its $34 IPO, especially when you see the underlying business growing. Despite the current bargain price, it is difficult to see a turning point for the stock soon due to the likely downturn in fundamentals for 2023, exacerbated by today’s challenging macro environment. current prices. Vontier is almost considered a dying company when it is far from it, the mobility solutions provided will continue to be important for days to come and although still soon they will line up on some interesting long-term trends.