Vontier: '1-Pager' Summary

Vontier Corporation (NYSE: VNT $25.17) MV = $4.1bln; EV = $6.3bln; 3mo ADV = 1.98mm shares

Trades @ 8.5x 2023E EBITDA; 9x 2023E FCF; Net Leverage Ratio = 3x

Blended Price Target: $36 or 44% Upside

Date: 4/18/22

Disclaimer: I own common shares in VNT. Please do your own work.

LINK TO FULL WRITEUP HERE

Background: Spin of a Danaher spin, Vontier (ticker: VNT) is a misunderstood compounder that trades at a significant discount to peers despite its proven ability to grow its top-line, expand best-in-class margins and generate substantial FCF ($3/share on $25 stock). Nearly all of VNT’s businesses were grown and developed as part of DHR – they focus on mobility technology (76% of rev -- fuel dispensers, point of sales systems in C-store etc) and diagnostic and repair technology (24% of rev -- diagnostic and wheel changing tools). Growth drivers for mobility technology include more sophisticated C-Store buildouts and increasing fueling station infrastructure in emerging markets. Growth drivers for diagnostic and repair technology include increasing number of cars on the road and increasing vehicle complexity.

Financial Profile: Consistent grower (5% CAGR from ’05-’20; 4% organic) with low cyclicality (down 6% in ’08, down 1% during COVID). Gross margins mid-40s, EBITDA margins mid-20s with excellent FCF conversion (100% of NI). Company favors investment in innovation (R&D 4% of sales) over capital spend (CapEx 2% of sales). Debt a manageable $2.3bln or 3x leverage and compares to $500mm of annual FCF. Company expects to consistently deliver 25-50bps of margin expansion from its DHR-influenced business systems practices (known as Vontier Business Systems or VBS).

What’s To Like? As a newly independent co, VNT is executing on its M&A strategy to diversify its business and bolster growth. Recent DRB acquisition (car wash technology) will be very accretive to revenue growth and sets up another powertrain-agnostic growth platform.

At the same time, VNT announced an ASR to purchase stock given management believes the stock trades at a ‘significant discount to intrinsic value.’ Stock is very cheap -- comps for VNT’s mobility technology business trade at 14x EBITDA while comps for its diagnostic and repair trade at 10x EBITDA. Even gas stations, with inferior financial profiles and greater internal combustion engine exposure trade at 10.5x EBITDA. Looking at the stock on a FCF basis, it trades at an 11% yield versus peers at 5.5%. Management believes too with both the CEO and CFO buying stock in early March.

Why Are We Getting This Opportunity? Market punished the stock after management surprised the Street RE: cadence of decline for a lumpy revenue source (regulatory driven mandate expired in 2021). While the guide does create a hole in 2023 revenue/earnings, it is both conservative (per competitor Dover) and does not reflect a longer-term shift in the drivers of growth.

Management: CEO Mark Morelli spent the first 14 years of his career working at United Technology. He previously worked at Columbus McKinnon Corp (ticker: CMCO) where he served as CEO from Feb ’17 to Jan ’20. During his tenure, he grew the top line 40% (13% organically), doubled operating income (expanding margins 400bps) and nearly doubling EPS. He is the beneficial owner of 357K VNT shares and his performance comp is tied to operating profit, organic revenue growth and FCF conversion.

What’s It Worth? On EV/EBITDA basis, a conservative Sum-Of-The-Parts yields a PT of $36 (+44%) though an upside case justifies a $40 stock (+60%). On a FCF basis, a peer multiple would get you a $50 stock or ~+100%.

What Are The Catalysts? Continued execution and generation of FCF. Accretive M&A to fill 2023E revenue/earnings hole. Sale of non-core assets in mobility technology or entire diagnostic and repair technology business.