Vontier Corp. (NYSE: VNT) with a HOLD rating. Vontier Corp. It began trading as an independent company on October 9, 2020, and was formerly part of Fortive Corp. (which itself was spun out of Danaher Corp. in 2016). Vontier has an experienced management team, a leading position in its market segments, and a strong balance sheet. The company’s long-term financial goals include low single-digit sales growth, margin improvement, and strong cash generation, though the pandemic will make fast growth tough to achieve in 2020-2021. On valuation, the shares are trading at mixed multiples compared to a group of industry peers. The P/E ratio of 12-times our 2021 EPS estimate is below the industry average of 31. However, Vontier does not pay a dividend, while the peer average yield is about 1%. We think that valuations are reasonable given expectations for slow EPS growth in 2020-2021. We may look to raise our rating to BUY as earnings improve.
Vontier began operating as an independent company in 3Q20, and all results for prior periods have been carved out from former parent Fortive’s accounting records.
The company reported 3Q20 results on October 29. Sales rose 4.4% on an organic basis to $746 million. The adjusted operating profit margin widened to 24.1%. Adjusted diluted EPS rose 25% to $0.80.
Management provided an outlook for 4Q. It expects core revenue growth in the mid-single-digit range, with adjusted core operating margin expansion of more than 200 basis points.
At the peak impact in April, shelter-in-place restrictions reduced miles driven by more than 40% and severely limited access to the company’s end-user customers, including mechanics. Since then, demand has improved in Vontier’s mobility technologies and diagnostic and repair technologies platforms. Meanwhile, sales of Matco tools recovered more quickly than management had anticipated as virus control measures eased, allowing for increased franchisee activity.
EARNINGS & GROWTH ANALYSIS
Vontier has two business segments. Mobility Technologies (78% of 3Q revenue) includes the Gilbarco Veeder-Root subsidiary, which supplies fuel dispensers, payment systems, point-of-sale systems, and forecourt merchandising and support services; Teletrac Navman, which provides fleet management solutions for construction and mining customers; and Global Traffic Technologies, which provides intelligent traffic control systems for emergency response services and transit agencies. Diagnostics & Repair Technologies (22%) includes Matco Tools, a provider of professional tools for the automotive and other industries; and Hennessy Industries operations, a service company that designs, builds, and markets aftermarket wheel service equipment.
In 3Q, Mobile Technologies revenues rose 5% year-over-year on a core basis, driven by growth in Mexico and new regulations that benefited Gilbarco Veeder-Root. Diagnostics & Repair Technologies revenues rose 6% year-over-year on a core basis, as sales of Matco tools rebounded.
Management is focused on improving margins. The adjusted operating margin widened by 290 basis points to 24.1% in 3Q, helped by increased working capital productivity.
FINANCIAL STRENGTH & DIVIDEND
Vontier had cash of $431 million at the end 3Q20, down from $491 million at the end of 4Q19. Total debt was $41 million, and the debt/cap ratio was a low 3%. The operating margin is typically in the 18%-20% range. Management’s goal is to maintain an investment-grade credit rating, with $1.5 billion of M&A capacity over the next 2-3 years. The company has set a cash flow conversion goal of 130%-140% for 2020. The cash flow conversion ratio in 3Q was 160%.
MANAGEMENT & RISKS
Morelli is the president and CEO of Vontier; he served as president and CEO of Columbus McKinnon from 2017 through January 2020. The CFO is David Naemura. Before joining Vontier, Mr. Naemura served as senior advisor to the CFO of Gates Corp. Karen Francis is the company’s chairman.
The company’s medium-term goals include sales growth in the mid-single-digit range; margin expansion of 25-50 basis points per year, resulting in an adjusted operating margin near 20%; and a free cash flow conversion ratio of greater than 100%.
Vontier’s strategy is to leverage secular macroeconomic trends, including population growth, increased traffic congestion, growing environmental concerns, changing fiscal regulations, and increased vehicle and supply-chain complexity. Vontier estimates that the revenue opportunity in the mobility market is $27 billion. The company, like its parent Fortive and Fortive’s parent, Danaher, has a growth-by-acquisition strategy.
There are risks to owning VTR shares. The company has global operations and is thus subject to changes in global economic conditions and outlooks, as well as to negative currency effects and trade wars. It is also subject to changes in regulations, competitive pressures, and the need to continuously develop new products and services. The company’s growth-by-acquisition strategy relies on management’s ability to integrate new operations.
Vontier Corp., formerly part of Fortive Corp., is a global industrial technology company focused on transportation and mobility solutions. Vontier is based in Raleigh, North Carolina, and has 8,400 employees.
Since trading began in early October, the shares have ranged between $26 and $34.
Vontier is in a unique space, as the company (formerly part of Fortive) has a long operating history but has only recently begun trading as an independent company. As such, historical multiples are irrelevant for valuation purposes. On other metrics, the shares are trading at mixed multiples compared to a group of industry peers. The P/E ratio of 12-times our 2021 EPS estimate is below the industry average of 31. The price/sales ratio is low at 2.1, below the peer average of 2.3. However, the company does not pay a dividend, while the peer average yield is about 1%. We think that valuations are reasonable given expectations for slow EPS growth in 2020-2021. We may look to raise our rating to BUY as earnings improve.
On December 14, HOLD-rated VNT closed at $32.25, up $1.07.