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In July 2016, Danaher Corporation (DHR) separated into DHR and Fortive Corporation (FTV); here is my recent DHR post and my recent FTV post. On October 9, 2020, FTV spun off the portion of its business that focuses on critical technical equipment, components, and software and services for manufacturing, repair and servicing in the global mobility infrastructure industry. This Vontier (VNT) stock analysis looks at the spin-off from FTV.
VNT's Vontier Business System is an iteration of the Danaher Business System and Fortive Business System playbooks. The business systems of all 3 companies focus on acquiring moat-worthy companies, boosting their operating margins through continuous improvement, and reinvesting cash flows in further M&A deals.
Information Sources
I purposely provide links to my sources of information to aid in your own analysis.
Part 1 of the FY2020 10-K has a good overview of VNT's industry, customers, business strategy, solutions and risks. Additional information is also available in the following:
- Q1 2021 Earnings Release and Q1 2021 Earnings Presentation;
- Q1 2021 10-Q; and
- May 25, 2021, Wolfe Research Transportation and Industrials Conference Presentation.
Vontier - Stock Analysis - Business Overview
Many investors may be unfamiliar with VNT. VNT's 5 businesses reflected in the image at the top of this post are, however, likely recognizable names.
VNT is a global industrial technology company that focuses on transportation and mobility solutions. It keeps traffic flowing through more than 90,000 intersections, more than 260,000 customer fueling sites, the monitoring of more than 480,000 commercial vehicles, and it equips over 600,000 auto technicians worldwide.
The company operates through one reportable segment and two operating segments:
- mobility technologies is a leading worldwide provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, telematics and smart city solutions.
- diagnostics and repair technologies manufacture and distribute vehicle repair tools, toolboxes and automotive diagnostic equipment and software and a full line of wheel-service equipment.
Historically, these businesses operated as part of FTV’s Industrial Technologies reportable segment.
Competition
VNT believes it is a leader in many of the markets it serves. However, its businesses generally operate in highly competitive markets. VNT is, therefore, unable to accurately determine its competitive position because none of its competitors offer all of the same product and service lines or serve all of the same markets.
The company's wide range of products and services and the variety of markets it serves means it encounters a wide variety of competitors. These competitors include:
- well-established regional competitors;
- competitors that are more specialized in particular markets; and
- larger companies or divisions of larger companies with substantial sales, marketing, research, and financial capabilities.
It faces increasing competition in a number of the markets it serves as a result of the entry of competitors based in low-cost manufacturing locations and increasing consolidation in particular markets.
The number of competitors varies by product and service line but VNT's management believes the company has a market leadership position in most of the markets it serves.
Key competitive factors vary among products and service lines and typically include:
- price;
- quality;
- performance;
- delivery speed;
- applications expertise;
- distribution channel access;
- service and support;
- technology and innovation;
- the breadth of products;
- service and software offerings; and
- brand name recognition.
Vontier - Financials
Q1 2021 Results and FY2021 Guidance
Links to VNT's Q1 Earnings Release, the accompanying Investor presentation, and the Q1 10-Q are provided at the beginning of this post.
When VNT released FY2020 results and FY20201 guidance on February 11, 2021, it anticipated Q1 2021 diluted net EPS of $0.47 - $0.50 and adjusted diluted net EPS of $0.52 - $0.55. FY2021 diluted net EPS guidance was $2.15 - $2.25 and adjusted diluted EPS guidance was $2.35 - $2.45.
Q1 2021 actual results have surpassed the upper end of guidance with diluted EPS of $0.54 and adjusted diluted EPS of $0.63.
VNT now anticipates Q2 2021 diluted net EPS of $0.43 - $0.47 and adjusted diluted net EPS of $0.50 - $0.54. In addition, FY2021 guidance is now diluted net EPS of $2.25 - $2.35 and adjusted diluted net EPS of $2.55 - $2.65.
Free Cash Flow (FCF)
The following is FY2021 FCF guidance.
Expectations are for VNT to continue to generate strong FCF for efficient deployment to enhance shareholder returns.
Vontier - Credit Ratings
VNT's high leverage is an issue. Note 4 - Financing in VNT's Q1 10-Q (page 14 of 40) discloses existing financing arrangements.
On February 26, 2021, Moody's, S&P, and Fitch assigned the following unsecured long-term debt credit ratings:
- Moody's: Ba1;
- S&P: BBB-; and
- Fitch: BBB-.
Moody's rating, the top tier of the non-investment grade speculative category, is 1 notch lower than the ratings assigned by S&P and Fitch. This rating defines VNT as being LESS VULNERABLE in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to an inadequate capacity to meet its financial commitments.
The S&P and Fitch ratings are the lowest tier of the lower medium grade investment-grade category. These ratings define VNT as having an ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to meet financial commitments.
I generally invest in companies with higher ratings. However, VNT generates robust FCF and the business faces limited cyclicality and is supported by recurring sales. I think VNT will be able to service its debt obligations and expect Moody's will upgrade the non-investment grade rating to a similar level to that assigned by the other two ratings agencies.
Dividend and Dividend Yield
On May 24, 2021, VNT declared its inaugural quarterly dividend. The $0.025/share quarterly dividend, or $0.10/year, yields 0.3% based on the current ~$34.40 share price.
The dividend yield is similar to that of DHR and FTV. In addition, VNT's capital deployment is likely to be very similar to that of its former parent companies; the former parent companies maintain low dividend payout ratios and retain funds to grow the business. This strategy has proven to be highly successful.
Investors seeking dividend income will likely shy away from an investment in VNT because the dividend yield is very likely to remain below 1.00%.
The weighted average shares outstanding at DHR and FTV remain relatively stable year over year. Since VNT is following DHR's and FTV's 'playbook', the share count is likely to remain reasonably stable.
Vontier - Valuation
FTV's revised FY2021 guidance is diluted net EPS of $2.25 - $2.35 and adjusted diluted net EPS of $2.55 - $2.65. Using the current ~$34.40 share price and the midpoint of these ranges, the forward diluted PE is ~15 and a forward adjusted diluted PE is ~13.23.
FY2021 adjusted diluted EPS guidance from 13 brokers is a mean of $2.66 and a low/high range of $2.60 - $2.75. Using the current ~$34.40 share price and the mean estimate, the forward adjusted diluted PE is ~13.
FY2022 adjusted diluted EPS guidance from 13 brokers is a mean of $2.74 and a low/high range of $2.55 - $2.94. Using the current ~$34.40 share price and the mean estimate, the forward adjusted diluted PE is ~12.6.
I am hesitant to use FY2022 estimates because so much can happen over the next 1.5 years and am relying on FY2021 guidance and broker estimates.
I think VNT's current valuation is attractive and expect the investment community will begin to take notice of VNT within the next year and we will witness an expansion in VNT's valuation.
Vontier - Stock Analysis - Final Thoughts
I think the current valuation is attractive based on my Vontier stock analysis; this is favourable from an overall potential investment return perspective.
Investors should not expect an attractive dividend yield from VNT and should not expect a significant share count reduction. If VNT's former parent companies (DHR and FTV) are any indications of what to expect, expansion in the company's valuation is likely to come from the retention of FCF and profits to fund growth through acquisitions.
VNT shares are currently held in one of the 'Side' accounts within the FFJ Portfolio but this holding is not within my top 30 holdings. I intend to add to my position in the account that currently holds VNT shares during the week of June 6, 2021.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I and long VNT.
Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
