Maksim Labkouski
Trimble (NASDAQ:TRMB) surprised its investors with a relatively expensive acquisition, one which caused a large pullback in its share price, certainly if we account for the size of the deal. To judge the impact of the transaction and see where Trimble is coming from, and heading to, I go back to February of this year when I last had a look at the shares, and concluded that Trimble was slowly finding its way.
Some Background
Trimble is driven by R&D investments, spending nearly half a billion to develop new products and technologies on a more than $3 billion revenue base, resulting in 1,000 patents on its name, while managing millions of sensors in the field. The company focuses heavily on the combination of GPS with positioning and productivity, to create integrated processes used in applications such as construction, agriculture, transportation and the core geospatial business.
Shares started 2020 around the $45 mark, ahead of the pandemic, as this resulted in full year sales falling 4% to $3.15 billion, on which GAAP earnings of $390 million were reported, with earnings equal to $1.55 per share. Adjusted earnings came in at $2.33 per share, albeit that it adjusted for $0.33 per share in stock-based compensation, resulting in a realistic $2 earnings per share number.
The promise was baked into the valuation already as shares had risen to the $70 mark early in 2021, to peak at nearly $100 in September of last year. This pushed up valuations a lot, even as the 2021 guidance (which initially called for sales between $3.3 and $3.4 billion) looked decent. That is, the sales part of the guidance looked solid, with adjusted earnings per share seen up just two cents compared to 2020, although the company kept on hiking the guidance throughout the year.
In February of this year, shares of Trimble traded around the $66 mark, which at the time marked a big pullback already. With realistic earnings power trending around $2 per share, valuations were very high, yet this came down quite a bit already early in 2022. In February, the company posted full year sales of $3.66 billion, on which it reported adjusted earnings of $2.66 per share, or $2.18 per share if we adjust for stock-based compensation expenses.
Net debt of nearly a billion is largely equal to $937 million EBITDA reported that year. With realistic earnings trending around $2.25 per share and the company hiking the 2022 guidance to $2.85 per share, multiples remained very demanding at 30 times earnings.
This was driven by solid long-term execution and positioning to long-term megatrends, in combination with a sticky and recurring revenue base, translating into predictable cash flows.
Cooling Down
Since February, shares have fallen from $66 to $55 at the moment of writing, having seen a modest recovery from their absolute lows around $50 per share in recent weeks.
The company initially guided for 2022 sales around $4.00 billion, on which adjusted earnings were seen at a midpoint of $2.85 per share. Following some divestments at the start of the year, and dollar strength, revenues were seen around $3.84 billion following the first quarter earnings release, with sales seen at a midpoint of $2.78 per share. The company cut the guidance to a midpoint of $3.79 billion and earnings of $2.75 per share following the second quarter results.
Third quarter results revealed a decline in sales, driven by the stronger dollar, with organic and constant currency sales still up 6%, yet growing slower than they have been doing in the recent past. This results in a further pullback in the guidance, with sales now seen at $3.69 billion and adjusted earnings at $2.64 per share. With stock-based compensation trending at $0.50 per share, the adjustment reveals realistic earnings of $2.14 per share, resulting in a 25-26 times earnings multiple at $55.
With 250 million shares outstanding, Trimble commands a $13.7 billion equity valuation, or $15 billion enterprise valuation, if we factor in $1.3 billion in net debt. This is equivalent to about 4 times sales and around 16 times EBITDA.
A Bad Deal
In December, Trimble announced an EUR 1.88 billion deal (nearly $2 billion) for German-based Transporeon, a cloud-based transportation management platform. With an EUR 190 million revenue contribution, the deal comes at a premium price of around 10 times sales, a huge multiple. There are some real positives as well as the business growing sales by 25% per annum as 30% EBITDA margins reveal around $57 million in EBITDA, marking greater margins than the own business.
While the acquired business trades at a 250% sales multiple in relation to Trimble, this drops to 200% if we focus on EBITDA multiples, as growth is more impressive, but the deal looks a bit rich.
Pro forma earnings power will likely be flattish as the additional interest expenses will eat all the acquired earnings power, resulting in no accretion at the start. This makes me cautious here, albeit the immediate share price reaction is a bit of an overreaction. Shares are down 6%, or $4 per share at this point in time, resulting in a billion in value having gone up into smoke.
This seems like an overreaction, as a billion valuation for Transporeon looks cheap, but investors do not like the move and leverage situation following the deal.
And Now?
Right now, we have seen Trimble see a tough year and with realistic earnings trending closer to $2 per share, as the valuation has come down a great deal, but certainly is not dirt cheap amidst a 25 times earnings multiple.
This growth is seen amidst secular growth and currently a leveraged balance sheet. While the appeal is not screaming here, I am happy to start nibbling at levels in the low-fifties, still considering Trimble a quality asset, albeit the latest deal looks a bit rich.
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