2023-05-02 17:21:07 ET
Summary
- Vertiv is up over 20% after reporting superb Q1 earnings, as both revenue and profitability saw excellent growth.
- The rapid development of the AI industry should generate meaningful tailwinds for the company moving forward.
- The company's current valuation remains significantly discounted compared to peers and its historical average.
- I rate the company as a buy.
Investment Thesis
After reporting impressive first-quarter results, Vertiv's ( VRT ) share price rallied last week and is now up nearly 20% since my last coverage in September. Despite the recent rebound, I still believe the company presents an attractive investment opportunity. The latest earnings were superb as both the top and the bottom line saw significant growth. The rapid development of the AI industry should also be a meaningful catalyst that generates ongoing tailwinds. The current valuation remains significantly discounted and should present great upside potential as the company continues to make progress. Therefore I am reiterating my buy rating on Vertiv.
Superb Q1 Earnings
Vertiv announced its first-quarter earnings last week and the results are excellent, especially on the bottom line. The company reported net sales of $1.52 billion, up 31% YoY (year over year) compared to $1.16 billion. On a constant currency basis, net sales were up 35%. The growth is driven by a 26% increase in volume and a 9% increase in pricing. The company ended the quarter with a backlog of $4.8 billion, up 16% YoY.
Product sales increased 40.2% from $849.4 million to $1.19 billion, accounting for 78.3% of total sales. Services sales increased 9.1% from $307 million to $334.6 million, accounting for 21.7% of total sales. Americas remain the strong region with sales up 61%, as volume grew 48% YoY. EMEA was solid with sales up 20% while APAC was the weakest with sales down 6%, as the momentum in China remain soft.
The bottom line was outstanding as the company continue to improve its operational efficiency. Despite facing inflationary pressure, costs as a percentage of sales dropped from 73.8% to 67.3%. The gross margin increased from 650 basis points from 26.2% to 32.7%. Spending also moderated, as SG&A (selling, general, and administrative) expenses as a percentage of sales declined 500 basis points from 25.3% to 20.3%. The lowered costs and expenses resulted in the company flipping from a net loss of $(45.2) million to a net income of $130.3 million. The net income margin was 12.7%. The diluted EPS was $0.12 compared to $(0.23).
Thanks to the strong momentum, the company also raised its guidance for FY23. Adjusted EPS is now expected to be $1.22 to $1.32, up from $1.17 to $1.27. Adjusted operating margin is expected to be 12% to 12.6%, up from 11.7% to 12.3%. Net sales growth is expected to be 14% to 16%, unchanged from the previous guidance.
AI Tailwinds
When I was first writing about Vertiv last year, ChatGPT was barely a thing. Within a few months, the AI industry has evolved substantially with Microsoft ( MSFT ), Google ( GOOG ) (GOOGL), and Amazon ( AMZN ) all chiming in. I believe AI will become a new and meaningful growth driver for Vertiv. According to Grand View Research , the market size of AI is forecasted to grow from $196.6 billion in 2022 to $1.81 trillion in 2030, representing a strong CAGR (compounded annual growth rate) of 37.3%. The massive increase in AI applications should also drive the growth and usage of data centers, which directly benefits the company. We are still in the early innings of AI and the ongoing development of the industry should generate solid tailwinds for the company.
Giordano Albertazzi, CEO, on AI investments
We are distinctly seeing the first signs of the AI investment cycle in our pipelines and orders. Vertiv is uniquely positioned to win here, given our market leadership and deep domain expertise in areas like thermal management and controls, which are vital to support the complexity of future AI infrastructures. Vertiv benefits from this race and is an agnostic partner of choice to the risk participants. The acceleration in investment in AI will turn into a net infrastructure capacity demand acceleration, and this starts to be visible in our pipeline.
Cheap Valuation
Despite the recent rebound, Vertiv's valuation remains extremely cheap in my opinion. The company is currently trading at a fwd PE ratio of 11.9x, which is significantly lower than other electrical equipment companies such as Emerson Electric ( EMR ), Legrand ( LGRDY ), and Eaton ( ETN ). As shown in the first chart below, it is trading at a discount of 41.7% compared to peers' average fwd PE ratio of 20.4x. The massive valuation gap seems unreasonable as the company's estimated revenue growth rate for FY23 is actually the highest among the peer group, as shown in the second chart below. On a historical basis, the current multiple also represents a meaningful discount of 42.2% compared to its own 5-year average fwd PE ratio of 20.6x.
Investors Takeaway
I believe Vertiv continues to present an excellent investment opportunity. The latest earnings demonstrated significant improvement in growth and profitability and the thick backlog should help the company better navigate the downturn. While the CAPEX of hyperscalers may moderate due to the slowing economy, the rise of AI should be able to offset some of that weakness. The company's valuation also remains extremely cheap, especially when considering its double-digit growth rates. I see meaningful upside potential for the company and I rate it as a buy.
For further details see:
Vertiv Q1 Earnings: Still Very Cheap