TRMB - Trimble Navigation: Time To Change Course

2023-11-01 18:18:59 ET

Summary

• Trimble Inc. has faced a tough year in 2023 and has now cut its guidance again due to an expensive deal in Germany and a complicated joint venture deal with AGCO Corporation.
• Trimble is an R&D powerhouse, focusing on GPS applications to improve positioning and productivity in various industries.
• The company's earnings power has been stable at $2 and change, as multiples have gradually come down after investors recognized that the company has not delivered on its growth promises.

Towards the end of 2022, I believed that Trimble Inc. ( TRMB ) ended the year with an expensive deal after the business faced a tougher year in 2022. After a lackluster performance so far in 2023, the company has now cut the guidance again, as an expensive deal in Germany is followed by a complicated joint venture deal with AGCO Corporation (AGCO), along with renewed operating weakness, raising some red flags with investors.

About Trimble

Trimble is an R&D powerhouse, spending some half a billion a year to develop new products and technologies, a very substantial portion in relation to a >$3 billion revenue base. With its ownership of over a 1,000 patents and millions of sensors applied in the field, the company focuses strongly on GPS applications in order to improve on positioning and productivity. Trimble's integrated products and processes are used in construction, agriculture, transportation and geospatial business, among others.

Shares of Trimble traded at $45 at the start of 2020, as the pandemic resulting in sales falling some 4% to $3.15 billion, on which GAAP earnings of $390 million (or $1.55 per share) were reported. Adjusted earnings came in at $2.33 per share, but as I am not happy to adjust for all the stock-based compensation, realistic earnings trended closer to $2 per share.

Amidst the rise in equity markets, shares rose to the $70 mark by year-end 2020, as shares rose to a high around the $100 mark by the summer of 2021. Only part of these expectations were fulfilled as the business grew 2021 sales towards $3.66 billion, yet realistic earnings only came in at $2.18 per share based on the adjusted earnings numbers that is I use (adjusted for stock-based compensation expenses).

The company initially guided for 2022 sales to advance to $4.00 billion with adjusted earnings seen at $2.85 per share, as softer operating performance and a strong dollar meant that the outlook was cut during the year. In fact, late in 2022, sales for the year were only seen at $3.69 billion, and with adjusted earnings seen at $2.64 per share, I pegged realistic earnings at just $2.14 per share if I adjust for a fifty cents stock-based compensation expense.

This made shares still expensive at $55, granting the company a $13.7 billion valuation based on a share count of a quarter of a billion shares, and $15 billion enterprise valuation following a $1.3 billion debt load. This debt load would jump overnight as Trimble announced an EUR 1.88 billion deal for German-based Transporeon, a cloud-based transportation management platform. With an EUR 190 million revenue contribution, the price was rather demanding, even as the business grew sales by 25% per annum and the business saw solid margins.

Regarding Trimble still a quality play, despite a tougher 2022, I was turning more upbeat than I was for a long time as shares have been trading rangebound between $45 and $60 per share so far this year.

A New Disappointment

In February, the company reported a 0.5% increase in full year sales to $3.68 billion as the company posted GAAP earnings of $450 million, equal to $1.80 per share. Adjusted earnings fell just two pennies to $2.64 per share and after subtracting a $0.48 per share stock-based compensation expense, realistic earnings came in at $2.16 per share.

The company guided for 2023 sales to advance modestly to $3.70-$3.80 billion, with adjusted earnings seen at $2.76 per share, plus or minus ten cents. Important to notice is that this excludes the contribution of Transporeon, with that deal closing early in April.

First quarter earnings, as released in May, showed a penny decline in adjusted earnings to $0.72 per share, as first quarter sales fell 8% to $915 million. On the back of the closing of Transporeon, full-year sales were now seen between $3.835 and $3.935 billion, with adjusted earnings seen at $2.62 per share, plus or minus ten cents.

Following the second quarter earnings release in August, the company narrowed the sales guidance to $3.845 and $3.925 billion with adjusted earnings seen at a midpoint of $2.65 per share, up three cents from the outlook issued before, but still flattish compared to 2022.

A Big Deal

By the end of September, Trimble announced that it has reached an agreement to form a joint-venture with AGCO to create combined expertise in the agriculture market. Trimble will contribute its agricultural segment to the joint venture (although it will keep part of the Global Navigation Satellite System) in exchange for $2 billion in pre-tax cash proceeds (and an estimated $1.5 billion after tax). Trimble will still hold a 15% equity stake in the joint venture, while maintaining many service agreements.

Assuming the transaction would have closed on the first day of the year, Trimble anticipates $25 million in equity income from its 15% equity stake in the joint venture as well as another $15 million in EBITDA from supply service agreements.

A Bombshell Report

On the first day of November, Trimble posted third quarter results, and while reported sales were up 8% to $957 million, organic sales were up just 2%. Adjusted earnings per share were reported at $0.68 per share, up two cents on the year before.

The company cut the sales guidance to $3.757 and $3.797 billion, seeing adjusted earnings at a midpoint of $2.62 per share. Net debt was reported at $2.8 billion following the deal in Germany, but this has not yet reflected the proceeds from the joint venture with AGCO.

It was the cut in the guidance and uncertainty of the AGCO impact and the surprising resignation of CFO David Barnes which spooked investors, sending shares down more than $6 per share to $40 and change.

The deal presentation with AGCO in September revealed some of the impact, as no longer consolidating the agro business will hurt sales by nearly $500 million per annum, a substantial amount given the total sales. Moreover, the pro forma impact on EBITDA has an estimated $145 million impact, a substantial number as well.

What Now?

Truth be told is that Trimble Inc. has lost its premium position here. With earnings power trending around $2 per share, or just above those levels, the premium multiple has fallen to about 20 times, or just below that at 18–20 times. With the AGCO proceeds meaning that leverage is no issue, the overall valuations are quite reasonable, it is the lack of premium awarded to the shares which looks fair.

This comes as Trimble has not been executing on its premium positioning, with the business struggling a bit, as M&A moves create a cloudy picture on top of this.

Amidst all this, appeal for Trimble Inc. is certainly on the increase, but it is the lack of growth and resulting valuation multiple contraction which means that while appeal is improving, it is not the same as a hugely appealing situation, as valuations have been too demanding, for too long. Nonetheless, a small position in Trimble Inc. here seems warranted, but a bit more stability and better-executed operations are needed in order to unveil the long term potential here.

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