Vontier Has Beaten Expectations Repeatedly, Could Be Forming Double-Bottom (NYSE:VNT)

Miesten käsi kortin valinnalla ja palvelusta maksamisella

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Vontier Corporation (NYSE:VNT) stock is back to its 52-week lows the second time this year. Meanwhile the company has delivered profitable growth and has beaten analyst expectations for the past seven quarters. The recent spin-off is trading at P/E-multiple of 6.5 while the company has been revising its guidance higher. Technically and fundamentally, the current situation could represent a good entry point for a swing trade or a long-term investment for value investors.

The company is about to report the second quarter earnings on the 5th of August 2022.

Company overview

The company is a spin-off from Fortive (FTV) since October 2020. Vontier is a collection of six businesses involved with different parts of mobility. The company supplies both hardware and software solutions to fuel stations and convenience stores, equipment for vehicle tracking and traffic control and tools for car technicians and tire servicing.

In the end of 2021, Vontier acquired a company called DRB, which supplies software solutions to car wash operations. The acquisition is part of a plan to diversify the company and add higher margin offering to the portfolio of businesses.

Will we see a double-bottom?

The stock price of Vontier has recently hit a 52-week low for the second time for the year. The RSI reading has hit a value of little over 30, remaining a tad higher than last time in the beginning of March. The stock appears to be oversold having declined nearly 30% year-to-date, while S&P 500 has lost 20%. Since its debut as an independent company, the share has declined 40%.

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Data by YCharts

The company has an intention to buy back its stock opportunistically. In the first quarter, the company bought back $257 million of its own stock. The company has further $400 million reserved for buybacks or acquisitions.

The short interest is rather small, only 2% of the outstanding stock. This indicates that there’s no great pressure hanging over the stock.

The analysts have an average target price of $34 for Vontier stock, however with a great variation, the lowest being $23 and the highest $46.

The business has been performing well

While the stock price has been heading lower, the earnings per share has been growing. The combination of lower share price, buybacks and earnings growth has brought price to earnings ratio to an extremely low level.

Yet, there has not been any signs of deterioration of the company’s profitability. The gross margin (44%) and operating profit (20%) have both remained on a healthy level without volatility. Furthermore, the company expects its cash flow conversion rate to be over 100% for the full year of 2022.

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Data by YCharts

Although several companies have been revising their revenue and earnings estimates lower, there’s still an expectation that Vontier will grow revenue and earnings in the following two years. For the following quarter, the company is expecting adjusted EPS of $0.68-0.72, while analysts are expecting $0.70. In the first quarter, the company raised its adjusted EPS guidance to $3.20-$3.30 from $3.05-$3.15.

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Data by YCharts

Vontier has beaten analyst estimates for the last seven quarters – all quarters as an independent company. According to the company, the latest acquisition by Vontier has been performing above the expectations. The rest of the company’s portfolio can be considered relatively stable. The revenues from its other brands improved from Q4 2021 to Q1 2022 despite numerous global challenges. For Q2, the company is expecting the revenue to be flat.

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Data by YCharts

Vontier is a classic spin-off case, where many of its subsidiaries have not got enough management attention. Several of its subsidiaries are in a turn-around mode, yet seeing a positive development already. The company has several avenues for growth. For example, its tool business, Matco Tools, is still spreading out its operations in the United States. Over 70% of Vontier’s revenues are generated from the United States, so there’s definitely potential for international expansion.

Downside considerations

Vontier carries a significant amount of debt in its balance sheet. The net leverage ratio stands currently at 3.3, however the company has been de-levering its balance sheet actively. The company expects the leverage ratio to go below 3 by the end of 2022. The cash position of the company decreased due to the buybacks. Despite the levered balance sheet, the EV/EBITDA multiple has gone to low levels together with the share price and improving EBITDA margin.

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Data by YCharts

Supply chain challenges might give a negative surprise. Vontier has suffered for some electronic component shortages at least in one of its operating businesses, which impacted the business by $25 million in revenue. The supply chain challenges could also increase the inventory levels and drag the results lower.

During 2019-2021, the largest subsidiary Gilbarco Veeder-Root (GVR, 66% of 2021 sales) benefitted greatly from a regulatory change in the U.S. The fuel stations needed to upgrade their payment terminals to new standards. The end of the transition has a negative impact on $300-350 million over the next two fiscal years out of annual revenue of $3 billion.

Fortunately, the company has growth platforms to off-set the impact and also other countries around the world are going towards the same transition which could provide an opportunity for Vontier. Nevertheless, the speed of revenue decline and the pace of new initiatives having an effect could surprise both the management and the investors.

It is often perceived that Vontier has a declining core businesses. The traditional retail fueling hardware brings 30% of the company’s revenues. While the transition to electric vehicles is gaining speed, Vontier is not sitting on its laurels. The company is planning to invest $500 million over the next 5 years to different initiatives in the future arenas. In addition, the company has a 16% stake in Tritium (DCFC) and acquired Driivz, an EV-charging company, in February 2022.

Conclusion

The recent share price decline could provide an attractive entry point heading into Q2 earnings. The stock can work as a candidate for a swing trade or as a long-term holding for an investor looking for value picks. Being a rather recent spin-off, the company could lack an interest from larger investor base.

While Vontier is not in the most promising star in the universe, it has a track record of earnings surprises ensured by stable and high-margin businesses. Combined with extremely low valuation without signs of rapid decline of the business and technically interesting chart, the current share price could represent an attractive entry point.

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