Vontier Looks Oddly Cheap Ahead Of Major M&A Deployment

Summary

• Vontier shares look oddly cheap, even when factoring in the potential weak long-term growth prospects of the retail fueling business.
• Leverage to fleet management and smart city instrumentation and software seems under-appreciated, but likely needs M&A to improve the portfolio and operating scale.
• M&A is the major unknown here. Management has made no secret of its intention to be active (with potentially $1.5B in initial spending), but the preferred targets are unknown.
• Vontier looks meaningfully undervalued as is, and I find it unlikely that management will destroy value through M&A.

Years of investing will make you paranoid, or at least highly suspicious, when you find what appear to be bargains hiding in plain sight. There are some issues with Vontier (NYSE:VNT), including a business that could be more vulnerable to the shift toward electrified passenger vehicle powertrains, but given the company's pedigree (part of the Danaher (DHR)/Fortive (FTV) family tree), a good CEO, and the explicit intention of deploying capital toward growth M&A, I find the discount to fair value today to be odd.

With what looks like fair value in the low-to-mid-$40s, I do wonder what I'm missing about Vontier today. Yes, there are EMV headwinds that will weigh on growth, and the business isn't as "future-proof" as you may like. M&A also carries risk, as the company could overpay or go down roads that lead nowhere. Still, with the base business undervalued on what I think are reasonable, if not conservative, assumptions, I think this is a name to check out.

Retail Fueling - It's Not Going To Vanish Overnight

Vontier currently generates around 70% of its revenue from its retail fueling operations (Gilbarco Veeder Root), where it provides basically "soup-to-nuts" equipment for retail fueling stations ranging from tank monitoring to fuel dispensers to payment systems. GVR is the leader in the U.S., with over 50% share and a sizable advantage over Dover's (DOV) Wayne.

At least on a surface level, I can see why there may be some concern about this business. In the short term, the EMV conversion process that fueled growth in recent years is going to slow. About 71% of U.S. sites have upgraded already, and that should climb to about 80% and then grow slowly thereafter. Overall growth in fueling station sites isn't particularly strong, and isn't likely to be a major source of growth in the U.S., though there are still some grocery

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.