New Holding...Vontier Corp. (NYSE: VNT)
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Company Profile
Vontier Corporation is an industrial technology company. The Company offers technical equipment, components, and software and services for manufacturing, repair and servicing in the mobility infrastructure industry worldwide. The Company supplies a range of solutions spanning environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management, software solutions for traffic light control and vehicle mechanics and technicians’ equipment. The Company markets its products and services to retail and commercial fueling operators, commercial vehicle repair businesses, municipal governments and public safety entities and fleet owners/operators. It offers a range of mobility technologies products, which includes retail/commercial fueling, telematics and smart city. its diagnostics and repair technologies products include vehicle repair and wheel-service equipment.
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Thumbnail Analysis
We recently raised our rating on the VNT shares to BUY. Vontier is a global industrial technology company focused on transportation and mobility solutions, an estimated $27 billion industry. It began trading as an independent company on October 9, 2020, and was formerly part of Fortive (which itself was spun out of Danaher in 2016).
Vontier has an experienced management team, a leading position in its market segments, and a solid balance sheet. President Biden’s focus on infrastructure and clean energy may provide a positive backdrop for Vontier. The company’s Gilbarco Veeder-Root subsidiary is addressing changing energy grid and transportation needs through ultrafast EV chargers, alternative fuels, emissions testing technology, and analytics.
We think that valuations are attractive given prospects for improving EPS growth in 2021-2022, and as the nation addresses changing transportation needs such as electric vehicle charging stations.
Source
Argus Market Watch, October 5, 2021
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Business Strategy & Outlook Krzysztof Smalec, CFA, Equity Analyst, 11 Feb 2021
Vontier’s business model is an iteration of the Danaher Business System playbook, which the firm inherited from its former parent companies, Danaher and Fortive. Vontier Business System focuses on acquiring moat-worthy companies, boosting their operating margins through continuous improvement, and reinvesting cash flows in further M&A deals.
The Danaher blueprint has generated impressive results, driving significant operating margin expansion in Vontier’s underlying businesses. For example, the formula has steadily improved Gilbarco VeederRoot’s operating margins from single digits to over 20% since the business was acquired by Danaher in 2001. Vontier has a strong record of continuous improvement, and we believe that management can continue to boost core operating margins by roughly 25-50 basis points per year.
In the near term, Vontier faces top-line headwinds in its retail fueling business due to the upcoming fraud liability shift (commonly referred to as EMV, which stands for Europay, Mastercard, and Visa) in April. That said, even though we expect EMV-related sales to ramp down from the peak, we still think that Vontier can deliver GDP-type growth over our five-year explicit forecast term.
Since Fortive was spun off from Danaher in 2016, Vontier’s parent company prioritized growth in its professional instrumentation business, which left the industrial technology business (now Vontier) with less than 5% of Fortive’s M&A capital. Therefore, we believe that the spin-off from Fortive will allow Vontier to redeploy capital back into its business and accelerate growth through M&A. We expect the firm to focus on bolstering its presence in high-growth markets, expanding into adjacent end markets, and investing in digital solutions that complement its installed base of equipment. Vontier is led by an experienced management team that is well versed in the Danaher playbook, and we believe that it will continue to drive profitable growth by successfully implementing the Vontier Business System.
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Economic Moat Krzysztof Smalec, CFA, Equity Analyst, 11 Feb 2021
We believe that Vontier, spun off from Fortive in 2020, merits a narrow moat rating based on customer switching costs and intangible assets. Vontier is a diversified industrial technology firm focused on transportation and mobility solutions. In both of its business lines, transportation technologies and franchise distribution, Vontier has developed recognizable brands and has built a large installed base of equipment that generates a healthy recurring revenue stream composing roughly 25% of its sales. Many of Vontier's products perform mission-critical functions, and the firm's reputation for quality and reliability is a key differentiator. Vontier generates gross margins in the low 40s and operating margins in the low 20s, and we think it is well positioned to outearn its cost of capital over the next decade.
Within transportation technologies, Vontier's Gilbarco Veeder-Root business offers retail fueling operators a wide range of solutions, including fuel dispensers, payment technologies for retail petroleum stations, and leak detection systems. Gilbarco is one of the two largest players in the retail fueling space (alongside Dover) and has established a recognizable brand as a leading provider of dispensers, payment solutions, and point-of-sale systems. The business has built a large installed base of equipment that includes around 650,000 pay-at-pump devices and 69,000 point-of-sale systems at convenience stores. Gilbarco generates healthy recurring revenue from multiple sources, including enterprise license fees for indoor point-of-sale solutions as well as its Insite360 platform, a SaaS-based offering that provides a suite of solutions to retail petroleum stations, including fuel management, logistics, and environmental compliance. We believe that Vontier's strategy of tapping into its large installed base by adding complementary software reinforces customer switching costs by offering petroleum stations a comprehensive package of solutions.
Vontier's transportation technologies portfolio also includes Teletrac Navman and Global Traffic Technologies. Teletrac Navman is one of the leading players in the telematics space, offering vehicle tracking, fleet management, and fuel consumption management solutions. It has an installed base of roughly 0.5 million vehicles and generates a steady stream of recurring revenue through its SaaS-based telematics platform. GTT is a provider of traffic management systems aimed at minimizing traffic congestion and providing prioritization for emergency vehicles. It has a leading position in 41 of the 50 largest U.S. cities and an installed base of over 90,000 intersections. GTT has a portfolio of patents and decades of experience that allow it to safely manage traffic, and we think the business is well positioned to capitalize on growing demand for smart city technologies.
Within Vontier's franchise distribution business, Matco Tools is a franchise-based distributor of tools and diagnostic solutions to the automotive aftermarket. We believe the unit has dug a narrow moat based primarily on intangible assets, including its strong brand and customer relationships. Matco's business model is based on franchise-operated vans that cover exclusive routes and sell tools directly from their trucks. Matco representatives regularly visit dealerships and repair shops along their van routes and develop lasting relationships with technicians. Mechanics often purchase their own tools, and our research indicates that over the course of their careers they typically spend well over $5,000 on tools, with some technicians spending as much as $30,000-$40,000. Tool distributors like Matco offer credit programs and set up customized payment plans for students and full-time mechanics. We believe this arrangement drives customer loyalty as mechanics rely on Matco's financing, and the company ensures that they have all the necessary tools to avoid any work delays.
We expect the rising complexity of vehicles to continue driving demand for Matco's diagnostic solutions. Matco sells diagnostics scan tools that allow customers to purchase a single piece of hardware and run diagnostics using different sets of software bought through a digital marketplace, either through a single-use fee or a monthly subscription. We see some evidence of customer switching costs as technicians become familiar with Matco's platform, and we expect the firm's SaaS-based offerings to help increase the business' recurring revenue stream and increase customer stickiness in the long run. Matco faces formidable competition, both from rival tool truck brands like Snap-on and Mac Tools as well as retail and online channels, but we believe that the business is more likely than not to continue out-earning its cost of capital over the next 10 years. We expect Matco to be able to ward off competition thanks to its exclusive van route network, frequent interactions with mechanics that drive customer loyalty, and growth in diagnostic solutions that become embedded in a repair shop's operations.
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Capital Allocation Krzysztof Smalec, CFA, Equity Analyst, 11 Feb 2021
We assign Vontier a Standard capital allocation rating, which reflects our overall assessment of the company’s balance sheet, management’s investment decisions, and shareholder distributions.
Vontier has a sound balance sheet, which we think well positions the company to pursue growth through M&A. Given Vontier's limited history as a stand-alone public company, we rate its investment history as fair. That said, we believe that the firm has inherited a proven business system of continuous improvement and disciplined capital allocation from its former parent, Fortive. Lastly, we view Vontier's shareholder distributions as appropriate.
Mark D. Morelli took the helm in January 2020. Before joining Vontier, Morelli served in a variety of leadership positions at large industrial corporations, including chief executive officer of Columbus McKinnon, president and chief operating officer of Brooks Automation, chief executive officer of Energy Conversion Devices, and president of United Technologies.
Chief financial officer David Naemura is well versed in the Danaher Business System philosophy as he spent eight years at Danaher, including serving as the vice president finance and group CFO from 2012 to 2015. Before joining Vontier in 2020, he spent five years as chief financial officer of Gates, where he played an instrumental role in the firm’s IPO.
Vontier’s business model is rooted in the philosophy of its former parent companies, Danaher and Fortive. Vontier Business System is an iteration of the Danaher playbook of acquiring moat-worthy companies, boosting operating margins through continuous improvement (for example, through improved supply chain and inventory management), and reinvesting cash flows in additional acquisitions. We believe that Vontier’s management team has the experience to continue to successfully implement the Vontier Business System and drive profitable growth through disciplined capital allocation and continuous improvement.
Source
Morningstar Equity Analyst Report
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Recent Developments
Vontier Announces Completion of DRB Systems Acquisition
Vontier Corporation (“Vontier”) (NYSE: VNT) announced today that it completed its previously announced acquisition of DRB Systems, LLC (“DRB”), a leading provider of point of sale, workflow software, and control solutions to the car wash industry, effective September 13, 2021. DRB will function as a standalone operating company within the Mobility Technologies platform.
As previously announced, Vontier expects DRB to generate approximately $170 million of revenue in 2021 with mid-20% operating margins and is expected to have a high-single digit long-term growth rate. Vontier expects the transaction to be immediately cash accretive and to contribute approximately $0.04 to $0.05 to adjusted net earnings per share in 2021.
Mark Morelli, President and Chief Executive Officer of Vontier, stated: “We are excited to announce the closing of the DRB acquisition and welcome the DRB team to Vontier. This is an important initial step towards diversifying the Vontier portfolio, enhancing our profitable growth profile, and accelerating our retail solutions strategy."
Business Wire, Sept 13, 2021
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