Trimble: Ark Space's #1 Holding Is Helping Farmers Be More Efficient

Summary

• Trimble's revenue declined 4% in 2020, but the global pandemic didn't keep the company from buying back $81.6 million in stock last year.
• TRMB recently got a boost when it was revealed to be the top holding in the new and highly anticipated ARK Space Exploration ETF.
• Trimble's guidance and positioning systems enable the company to develop management tools to make farmers more efficient.
• While the stock looks a bit expensive, TRMB could be a big beneficiary of Biden's recent American Jobs Plan proposal.

Photo by aapsky/iStock via Getty Images

My first Seeking Alpha article on Trimble (NASDAQ:TRMB) was a dud (see Trimble: Wait For It). I say that not because it was very lightly read and only generated one comment, but because I blew it: the stock is up 50%+ since it was published. I was overly influenced by the TRMB's soft Q2 (revenue was down 14% and EPS was down 32%). Since then, everything appears to be coming up roses for Trimble. All things considered with the pandemic, TRMB posted strong FY2020 earnings, gross margins are increasing, the company bought back $81.6 million in shares last year, it is the #1 holding (with an 8.9% weight) in the new and highly-anticipated ARK Space Exploration ETF (ARKX), and the stock is hitting all-time highs. Going forward, I see three primary catalysts: increasing annual recurring revenue (i.e. higher margins), agriculture, and the potential positive impact of President Biden's ambitious American Jobs Plan ("AJP").

Investment Thesis

Trimble operates four business segments and the Q4 results for each are shown below:

Source: Q4 Presentation

The Buildings & Infrastructure Segment is the company's largest. That being the case, TRMB could be a big beneficiary of President Biden's recently unveiled $2+ trillion American Jobs Plan (see the FACT SHEET on the White House website). In my recent article on the Global X U.S. Infrastructure ETF (PAVE), I showed the following graphic which summarizes the proposed infrastructure spending breakdown:

Source: Global X Research

In aggregate, the above infrastructure spending equates to $1.4 trillion. This plays right into the strength of Trimble's Viewpoint and e-Builder software products. The plan will likely also be positive for TRMB's Transportation segment (80% high-margin subscription revenue in Q4).

Meanwhile, Trimble's smallest operating segment - Resources and Utilities - is likely to benefit from global trends in agriculture. Ark Invest analyst David Conway recently wrote a research note titled Automation of Global Agriculture Will Yield Significant Growth. In the article, Conway points out how much more productive US farmers are as compared with farmers in China and India - two countries with very large populations and facing food security concerns:

Source: Ark Invest

Conway says:

Clearly, the potential for large-scale productivity gains and wealth creation in the agricultural sector is enormous with increased automation, and not just in China and India. According to the World Bank, more than one billion people are employed in agriculture globally, roughly a third of the global workforce. The companies enabling this shift include Deere & Company (DE), Monsanto (MON), and Trimble could enjoy dramatic growth as they do.

Indeed, while Trimble started out as a GPS company, over the years, it has evolved through positioning, productivity, and now offers a fully integrated productivity and work process platform. As a result, Trimble provides automated tech solutions and systems that can help farmers improve every step of the farming process - from land preparation to harvest. These solutions enable farmers to save fuel, time, increase yields, and as a result increase the farm's overall productivity.

Earnings

Trimble released its Q4 and FY2020 EPS report on February 10th and, all things considered with respect to the global pandemic, it was a strong performance. First the bad news:

• FY2020 revenue of $3.15 billion was down 4% yoy.
• FY2020 EPS of $1.55/share was down 24%.

Now the good news:

• Annual operating cash flow was a record $672 million.
• Gross margins of 55.8% were up 1.2% yoy.
• Operating cash flow of $672 million was up 15% yoy.
• Annual recurring revenue ("ARR") of $1.3 billion was up 9% yoy.

As can be seen, ARRs are now 41% of Trimble's total revenue, and that bodes well for stable cash flow going forward. The margin expansion was significant and led to the 15% rise in yoy operating cash flow despite a fall in revenue.

Going Forward

Trimble recently announced "Trimble Quest" - a new SaaS and cloud-based cost estimating and budget management tool for the civil construction market. This is a very well-timed addition to the portfolio and will enable civil engineers to efficiently bid on projects - and hopefully land some new business from President Biden's AJP.

In agriculture, we need only listen to Trimble CEO Rob Painter's comments on the Q4 conference call and his vision for an autonomous futures for farms:

So if we look at the primary products that we offer in the agriculture market today, that would capture guidance, it would capture water management, it would include the variable rates, and then we also have the weed seeker product ... spot spray optimization ... And so the strategy we have is the connected farm strategy in agriculture.

So, just from an organic view of our product portfolio, we are bullish on the opportunities in agriculture to connect what we're doing together to create additional ROI for our customers. What we'll build on top of that is our autonomy strategy, and we see autonomy as a series of increasing levels of automation over the coming quarters and years to move us really more into that autonomous future.

While Trimble's current technology suite of solutions already enable them to compete effectively in the autonomous farming sector, Painter left the door open to potential acquisitions in the space in order to accelerate progress. I suspect any acquisitions will be more in the realm of niche tuck-in additions as opposed to any big transactions requiring debt and equity offerings.

FY21 Guidance

The company's 2021 guidance is summarized below:

Source: Q4 Presentation

As can be seen, Trimble's ARR story is bullish because it is leading to margin expansion - and that catalyst is expected to be a continuing tailwind in FY21.

The midpoint of non-GAAP revenue ($3.35 billion) compares to non-GAAP revenue of $3.15 billion in FY20 or an estimated increase of 6.4% yoy.

The midpoint of non-GAAP EPS ($2.35/share) compares to non-GAPP EPS of $2.23/share in FY20 or an estimated increase of 5.4% yoy.

Note the 254 million shares outstanding would be up slightly from the average 253.5 million fully share count at the end of Q4.

That brings up a good point: despite Trimble's $81.6 million in share buybacks during FY2020, it ended the year with only ~600,000 less shares than it started the year with. And while the company reported it still had $90.7 million left on the current buyback authorization as of the end of Q4, clearly, the company's guidance for this year does not expect those buybacks to actually reduce the overall share count as stock-based compensation will dominate over the buybacks.

Risks

As can be seen by the company's own guidance, the FY21 revenue and earnings growth rates are not that compelling for what an investor might typically expect from a growth company and a #1 holding in an ARK ETF.

TRMB's estimated 1.6x net debt to EBITDA ratio is reasonable and it is likely the company will use FY21 free cash flow to pay down debt but also watch for potential and strategic M&A activity.

The Democrats could have trouble pushing President Biden's AJP through Congress. It may rest on the shoulders of West Virginia Senator (D) Joe Manchin, who has already said the bill's proposed corporate tax rates needs to change to 25%. The AJP will likely need a YES vote from all Democratic Senators as, just like the American Rescue Plan, it is doubtful any Republican Senator will vote for it regardless of any changes and regardless of the fact that ~80% of Americans support the infrastructure bill.

Source: Navigator Research

Summary & Conclusion

Trimble's FY21 financial guidance seems on the low-end of what a typical investor might expect for a company sporting a forward P/E=34x. However, as we have seen from Cathie Wood's favorite picks, like Tesla (TSLA), she prefers to invest for the long term and in disruptive companies. She has said many times one of the criteria ARK uses for investing in disruptive companies is an expectation of a 15% CAGR - implying a doubling of the company's size (and hopefully the stock price) every five years. Trimble likely won't meet the 15% growth rate expectations in FY21, but I wouldn't count the company out in FY22-25. That said, given Trimble's recent stock price gains (see chart below) and FY21 guidance, I rate the stock a HOLD and would look for a better entry point for new investors - something around $65/share would be attractive to me. At that price, the non-GAAP P/E would be estimated 28x based on the midpoint of the company's FY21 guidance.

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.

I am an electronics engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.