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.
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.
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.
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.
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.
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.
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%.
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.
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.
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.
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.