McKinsey recently released their report on "Twelve potentially economically disruptive technologies: Advances that will transform life, business, and the global economy." They include ideas such as the Mobile Internet, 3D Printing, and Cloud technology, which will drive innovation -- especially the disruptive kind -- in the years ahead.
To me, some of these ideas seem too risky to invest in: it is hard to predict who will come ahead, for example, in 3D printing. But I think many of you will agree that some of these are attractive investment ideas: if I knew who will come out ahead in "Next-generation genomics," for example, I would want to put my money there -- there is a guaranteed market for whoever comes out on top.
I think a company already is clearly leading the field in two of the innovative areas McKinsey listed: Automated Vehicles" and the "Internet of Things." This company has nearly doubled sales and tripled EPS since 2007, has revolutionized the productivity of an entire industry crucial to the survival of the human race, and has made inroads into improving productivity in numerous other industries. And yet this company trades at 18x 2013 earnings.
This company is Trimble Navigation (TRMB). At $7B market cap and held by many institutional investors, Trimble is no secret. Many of you are linking to this story because you know Trimble to begin with. While the company is no longer a venture, I believe it has one of the most convincing long-term growth stories in the market, and the recent stock price weakness offers a unique opportunity to invest in a company with a "Wide Open Road" ahead of it.
I see two main reasons to buy Trimble now:
- Long-term growth drivers remain as convincing as ever -- in multiple industries and regions
- Q1 weakness are due to short-term issues, not execution problems
Growth Drivers: GPS drives historical productivity gains
Geo-positioning data has been around for years, but only recently has software and interface technologies improved to where GPS data has significantly improved productivity of entire industries. Did you know, for instance, that the entire United States ag industry has been revolutionized by Trimble's technology? Only several weeks ago, the US was concerned that a wet spring would delay planting until later in the year, which dangers corn as plants are exposed to the hot sun too early. In other words, there was the threat of severe corn shortage this summer, but this abruptly changed last week. A quote from a recent Financial Times article:
"...The US Department of Agriculture said late on Monday that US farmers planted 42m acres (17m hectares) with corn last week, a record area for a seven-day period and larger than Austria, Ireland or South Korea...
The rapid planting pace made it more likely the US would meet record harvest expectations this year, filling up depleted global inventories, as corn planted earlier will be less vulnerable to extreme summer temperatures...
The blistering pace of planting shows how new technology, from global positioning systems and huge 48-row planters to self-driving tractors, has transformed farming."
One farmer claimed, "It's a lot easier to plant at night when you have GPS and autosteer…the electronics take all the work out of it."
This summer hasn't been an anomaly: precision agriculture, as technologies like GPS and autosteer which improve ag productivity are known, has been known to farmers as revolutionary:
- Precision ag reduces the water required on a field as water is becoming more precious, especially in dry areas like the Central Valley in California.
- Precision ag reduces required fertilizer.
- Precision ag reduces fuel consumed by tractors.
- Farmers quickly earn a high ROI on their precision ag investment…
It is hard to find a negative to all of this.
Trimble has been the market leader in precision ag-with a large OEM agreement with Case New Holland (Fiat International), Caterpillar (CAT), and a strong aftermarket dealer presence, they have over 30% of a $2.0B market. Competitors include Raven Industries (RAVN), which focuses more on sprayers, Topcon, Ag Leader, and a few other smaller players, but no one has the scale of Trimble. This is also a very profitable segment, at 38% OPM.
There will be more growth ahead, as technology and software improves. The drivers are some of the hardest to run away from: increasing population growth, increased strain on water and fertilizing resources, a demand for efficient use of all farm inputs. Growth will continue. Innovations such as Monsanto's FieldScripts (MON) offer new opportunities to use geospatial data, and will drive further penetration around the world.
Trimble had a rough first quarter as farmers put off their purchases due to wet weather, but the precision ag story is convincing: many grain-focused countries, such as Brazil, Russia, China, and Eastern Europe, are only beginning to incorporate this technology. It has a long way to run.
Construction: The Holy Grail of Geospatial Data Management
Trimble's largest segment in terms of sales is Engineering and Construction, which serves the building and construction market. This segment provides devices and software used to measure distances and geospatial data during the construction of homes, roads, bridges, and other modern infrastructure. When you visit a workplace and see workman using Total Stations to measure off distances, they are using equipment from Trimble or one of their competitors.
Construction is a more demanding market than agriculture in many ways: architects can come up with a variety of building plans that need to be staked out, bulldozed, and built with very demanding accuracy requirements. The process of constructing a building includes design (often on AutoCAD), surveying, and building, with constant demands on engineers to ensure they are matching the locations of the real world to those of the design world. Geospatial companies like Trimble and their main competitors -- Leica Geosystems and Topcon-add value by helping to merge the design and reality.
The Holy Grail of this market is eliminating the constant measurement and surveying during construction: instead, an architect would draw up his designs, and bulldozers and workers would flatten, doze, and install according to the design using real-time geospatial data and guides. Some of this is happening already, as Trimble GPS guides Caterpillar bulldozers in roadmaking and other applications. But the industry is still perfecting the exact software-hardware mix to make construction more efficient and safe.
Like agriculture, however, the effectiveness of precision technologies in improving productivity and lowering cost for construction applications is without doubt. Many California road contracts now require the use of these technologies in order to lower costs. See a federal highway report on these technologies here.
Trimble has an OEM agreement with Caterpillar, and the two companies jointly promote their geospatial technologies around the world. Hexagon, the parent of Leica Geosystems, is strong in the mining market and Europe whereas Trimble is stronger in the United States and in more traditional construction markets. Both competitors have actively bought software companies to incorporate new designs, user interfaces, and uses for geospatial data into the work processes. Trimble bought a great start-up, Sketch-Up, from Google in 2011 which is used by millions of amateur designers around the world. While many users likely asked, "Trimble who?" after the acquisition, they likely have discovered that Trimble has left the company to run autonomously as they innovate ways to integrate it into the workflow. I think acquisitions like this give Trimble a user base and flexibility to incorporate geospatial data into various types and complexities of workflows.
The margins in both of these businesses is outstanding: 37% for Field Solutions, 20% for Construction. The company has managed operating leverage very well and has gradually improved these margins.
A Poor 1st Quarter, and Big Departure
For the first time since 2009, Trimble reported earnings below expectations last quarter. The reasons were primarily two-fold:
- The wet spring season kept farmers from making capital purchases until later, which may be delayed until later in 2013 or beyond, and
- Sequester affected Engineering and Construction orders
After the earnings announcement on May 1st Trimble dropped 8%. Trimble had met or exceeded expectations in the previous 12 quarters, and the 8% decline was the largest post-earnings drop for Trimble since at least 2008.
There was one additional complication to this quarter: following this performance, the long-time CFO of Trimble, Rajat Bahri, announced his resignation to leave for a private equity firm. The timing and situation of this departure was suspect: he left effective immediately, is not turning over with his successor, and has still not publicly announced where he will be working next. Trimble is looking for a backup CFO but did not start this search until recently; all signs point to some sort of internal conflict causing this resignation. The CEO very curtly referred to the resignation as just that in a conference earlier this month, and there is certainly more to this story. A sign of danger to come?
I don't know any details, but I suspect Trimble will be fine without Mr. Bahri and that the company will attract good talent to replace him. In the meantime, Trimble has performed poorly of late: since the earnings announcement, the stock is down 3% vs. a 3% gain for the S&P500.
A Chance to get into a Real Growth Story
Trimble has underperformed, and the CFO's departure also provides some uncertainty. The ag market raises questions for the first time in years, as corn prices drop and threaten to lower overall farm investment in 2013-2014.
This uncertainty is a gift-Trimble's long term story is as intact as ever. As the world population grows to 9 Billion and beyond, farmers will need to get more fruit from the land with less. Builders will need to build bridges with more accuracy and speed, and pave roads with less cost. GPS data and the ability to manage geospatial information will continue to drive productivity around the world, and that makes Trimble one of the best long-term investments you can make in 2013.