Trimble: Acquisitions Creating Growth Through Synergies

Summary

• Trimble reported earnings recently and had strong EPS as well as 2023 guidance.
• The company's acquisition strategy has created synergies for the long-term such as with their purchase of Transporeon.
• Assuming my DCF assumptions, TRMB stock is currently overvalued, resulting in a hold rating.

ipopba

Trimble (NASDAQ:TRMB) has exemplified strong and consistent growth throughout the past few decades. With strong organic growth along with synergies through acquisitions, I rate the stock as a hold due to its overvaluation in a recessionary climate.

Business Overview

Trimble Inc. provides technology solutions that enable professionals and field mobile workers to enhance or transform their work processes worldwide. The company has 6 segments, including buildings and infrastructure, geospatial, utilities, transportation, advanced devices, and agriculture. The company was formerly known as Trimble Navigation Limited and changed its name to Trimble Inc. in October 2016. Trimble Inc. has over 11,825 employees, was founded in 1978, and is headquartered in Westminster, Colorado.

Trimble Website Overview

With a market capitalization of $11.708 billion, a 7% ROIC, a 52-week high of $72.24, and a low of $45.43, a price of $47.41 with a 16.77 forward P/E for Trimble displays a price that is at its lows and indicates possible movement into value territory. Trimble also does not pay a dividend, which allows them to focus on growth and make rather large acquisitions in proportion to their size, as explained later in this article, resulting in operational synergies and growth.

Seeking Alpha

In the first quarter of 2023, the company's EPS exceeded expectations with an 8.02% beat at $0.67 compared to $0.72, while revenue had a slight miss of 1.54% at $929 million compared to $915.4 billion. Despite moderate economic headwinds, the company demonstrated outperformance by improving synergies and expanding margins due to overlaying fixed costs. This achievement in Q1 demonstrates that strategic acquisitions and synergies can drive growth, as gross margins have increased from 56.3% in 2016 to 64.2% this quarter. In terms of guidance, Trimble anticipates 2023 revenues to be between $3.835 billion and $3.935 billion, with gross margins set to expand by 300 basis points. This positive guidance during macroeconomic challenges further proves the company's ability to synergize acquisitions effectively, create margin expansion in the long term, increase cash flows, and ultimately drive growth.

Trimble Compared to the Broader Market

In the last 5 years, Trimble has underperformed the S&P 500 which is due to their recent correction in the past year. I believe that the company's ability to employ capital along with its strong core business model will enable the company not only to meet the S&P in the future but also to outperform the market in the long term.

Trimble Compared to the S&P 500 5Y (Created by author using Bar Charts)

Creating Synergies Through Strategic Acquisitions

Trimble's commitment to enhancing its core business segments through research and development and acquisitions has resulted in increased exposure to new markets and diversified revenue streams, enabling the company to hedge against headwinds such as secular slowdowns. One noteworthy acquisition is Trimble's €1.88 billion all-cash purchase of Transporeon in 2022.

"Transporeon's open platform integrates with over 3,000 global ERP and transportation management systems, enabling a dense network to facilitate over 25 million on-platform transports in 2022" (acquisition press release).

"Transporeon helps customers increase competitiveness, lower costs, reduce waste, and solve complex freight problems through automation, real-time insights, and network participation" (acquisition press release).

The acquisition of Transporeon has synergized well with Trimble's core businesses, with Transporeon providing complementary solutions for Trimble's customers, focusing on short travels while Trimble's current transportation services focus on long-distance. The integration of Transporeon's logistics software into Trimble's portfolio enables the company to expand into a new market segment without cannibalizing its current products, creating a diversified portfolio that fosters growth in Europe, where Transporeon primarily operates.

Quarterly Investor Presentation

Analyst Consensus

Analyst consensus rates Trimble as a "buy". The stock holds great potential returns, as exemplified by the 1-year average price target at $61.57 presenting a 29.86% upside.

Trading View

Valuation

Before determining the fair value of Trimble, it is essential to calculate the Cost of Equity and WACC using the Capital Asset Pricing Model. By factoring in a risk-free rate of 3.36%, I was able to calculate the Cost of Equity for Trimble to be 7.90%.

Created by author using Alpha Spread

Using this value, I calculated the WACC for Trimble to be 7.43%, which is below the industry average of 11.29%. This suggests that Trimble has a lower cost of capital than its competitors, making it a potentially attractive investment opportunity.

Created by author using Alpha Spread

To determine the fair value of Trimble, I employed a Firm Model DCF analysis using Free Cash Flow to Firm (FCFF) without Capital Expenditures (CapEX). After considering various factors such as the company's past performance, industry trends, and expected growth rate, I arrived at a fair value estimate of around $37.70, which indicates that the company is currently overvalued by 20%.

To arrive at this estimate, I utilized a discount rate of 9% for a 5-year duration and added a 1.57% risk premium to account for macroeconomic headwinds. Furthermore, I predicted that Trimble would continue enhancing its innovations and acquiring more efficient assets to gradually increase its margins over time.

Overall, my analysis suggests that Trimble is currently overvalued, but its lower cost of capital and potential for future growth make it an interesting investment opportunity if the right price presents itself in the future.

Firm Model DCF Using FCFF Without CapEX (Created by author using Alpha Spread)

Capital Structure (Created by author using Alpha Spread)

Risks

Macroeconomic Headwinds: The volatility of the global economy, which includes economic downturns, recessions, and currency fluctuations, may negatively impact Trimble's business and financial performance, potentially hindering the company's ability to strengthen its core business segments or expand into new growth areas due to limitations in free cash flow.

Supply Chain Disruptions: Trimble relies on a restricted number of contract manufacturers to produce, test, and assemble specific products, as well as particular suppliers for critical components. These contractual arrangements can typically be terminated with short notice. This reliance on a limited group of manufacturers and suppliers poses several risks, including the possibility of not being able to acquire necessary products or components to fulfill customers' delivery needs, reduced control over pricing and delivery schedules, and the discontinuation of or increase in prices for certain components.

Conclusion

To summarize, Trimble's success in recent earnings by synergizing acquisitions and its ability to utilize capital efficiently indicate the company's potential for long-term growth. But, with a relative overvaluation, assuming my DCF assumptions, I rate TRMB stock a hold.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[grmk]

Did you just copy the calculation for the DFC? This is extremely wrong. Looking at the listed website you seemed just to have copied the whole calculation without even looking that the site. It didn't use actual data for their growth estimates and just assumes it decline to 3% over 5 years which is a generic generated growth decline rate. That's definitely not based on any analysts. The site assumes a terminal growth rate of 1.3% after 5 years which is crazy. This is not good a basis for long term analysis and explains why your result is so unreasonable.

Edit: Actually fiddling with it. A big reason for this is that you didn't adjust the terminal growth rate and it just mapped a linear decline to your terminal growth rate which is set 0. You literally had to add only a terminal value to add minimum value and somehow failed to do so.

[ric koehler]

I STRONGLY disagree with your Fair Value estimate $37.70. I guess it depends on what assumptions you use (or maybe on what you've consumed recently). You are implying a PE Ratio of about 18 using company's recent 2023 EPS guidance. All you write about Trimble as a company is spot on - tho they face macro headwinds, Trimble demonstrates they thrive, with rising margins and creating synergies from acquisitions. In short, Trimble executes. The stock price deserves pricing as a growth stock, with a PE closer to its historic 25 to 30. A minimum price target of $60 is reasonable.

But a question: why has stock price decreased as company fundamentals improve? Perhaps the recent positive reaction to Earnings Report is changing that direction.

[Francesco Infusino]

@ric koehler Regarding my assumptions, I utilized the company's projections for revenues and factored in margin expansion due to synergies that the company will utilize. I believe that Trimble should not be valued as a growth stock as the company as annual revenue for 2022 was $3.676B, a 0.47% increase from 2021 and their guidance provides a mid-single-digit growth rate into the following years. Along with that, I decided to add a risk premium to my assumptions to better factor in the potential headwinds ahead. Without such a risk premium, the stock would be much closer to fair value. But, if you believe that the company is intentionally underestimating its OWN revenue growth rates and you would feel comfortable investing by carelessly leaving macro headwinds out of the picture, then it could be a great "growth" stock.

[JB170]

Kinda feels like a mismatch between what you say and feel. As you express good things about the company, growth from sinergies but also.dont go into detail in their business units, yet claim.it will keep going down

[Francesco Infusino]

@JB170 on a value perspective I believe the price may be too high, but I do have confidence in the company’s ability to grow in the long term, hence the hold rating.

[JB170]

@Francesco Infusino why the lowe P/E then? seems like that would be given to a stagnant business.

[Francesco Infusino]

@JB170 Trimble currently has a P/E of ~25 with a forward P/E of 16.77 which is positive in regards to earnings growth and exemplifies that these earnings are already priced in. Also, it is expected that Trimble continues to grow in the mid to high single digits in regards to revenue and continues to expand margins. That is why I rated Trimble as a hold as the company is not stagnant, but is overvalued when compared to their growth rate.