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Have you heard about Vontier Corporation (NYSE:VNT)? It’s one of those under-the-radar companies that’s been quietly making waves. This year, as the U.S. economy flexed its muscles against rising interest rates, Vontier stood out as a resilient player. I’ve brought this gem to your attention before, suggesting it’s worth keeping an eye on, and I’m here to tell you, things are looking up for Vontier.
2023 was a good year for them, and now, their future seems even brighter. With the economic landscape showing signs of improvement and the Federal Reserve possibly easing up on interest rates, Vontier is gearing up for what could be an even more successful period ahead.
A Resilient Performance
Vontier provides hardware and software solutions for the mobility industry. Its portfolio includes fueling equipment, environmental sensors, vehicle repair tools, and fleet management systems. At the outset of 2023, amid widespread concerns about a potential recession triggered by the Federal Reserve’s interest rate hikes to combat inflation, Vontier’s future seemed uncertain. Typically, such monetary tightening can lead to economic downturns or recessions, potentially impacting companies like Vontier with reduced revenues and earnings. However, the U.S. economy has demonstrated remarkable fortitude.
The Federal Reserve’s aggressive interest rate hikes, culminating in a 525 basis point increase to a range of 5.25% to 5.50%, has been effective in reducing inflation. The Consumer Price Index [CPI] for all items rose by only 3.2% in October, a significant decrease from June’s peak of 9%. Contrary to fears, the central bank’s actions didn’t plunge the U.S. into a recession. Instead, the country’s GDP growth accelerated, from 2.2% in the first quarter of 2023 and 2.1% in the second quarter, to an impressive 4.9% in the third quarter.
In this background, Vontier has maintained robust performance. It’s important to note that the company’s results, particularly in its largest segment, Environmental & Fuelling Solutions [EFS], have been skewed by the conclusion of the adoption of the EMV (Eurocard, Mastercard, and Visa) payment standards. To provide a clearer view of its operational health, Vontier reports both core results, which exclude the impact of one-time items such as acquisitions and foreign exchange movements, and baseline core results, which further remove the influence of the EMV standard’s implementation. This baseline core data offers a more accurate reflection of Vontier’s true performance in the face of these economic headwinds.
In its latest third-quarter report, Vontier revealed robust results. The company’s GAAP and core sales dipped by 3% year-over-year to $765 million. However, showcasing resilience, Vontier’s baseline core sales saw a 10% growth. This upward trend was consistent across all three of its business segments. Notably, the EFS segment, which faced challenges due to the EMV sunset, witnessed a 13% rise in baseline core sales, with a 10% drop in GAAP sales. The Mobility Technologies segment, Vontier’s second largest, experienced a 12% increase in baseline core sales and an 8.4% rise in GAAP sales. Meanwhile, the Repair Solutions segment, unaffected by the EMV sunset, enjoyed a 5% sales increase.
On the earnings front, Vontier’s adjusted profit for the quarter was reported at $0.73 per share, a decline from the $0.86 per share recorded in the same quarter of the previous year. While Vontier doesn’t provide baseline figures for its earnings, the 10% growth in baseline core sales and a 40 basis point increase in baseline operating profit margin suggest that the profit drop was largely due to the impact of the EMV sunset. Without this factor, it’s plausible that Vontier’s EPS could have seen an upward trajectory.
Beyond the numbers, Vontier’s performance indicates that it has been thriving in a healthy business environment, despite the prevailing high-interest rates. The company’s dispenser business, for example, witnessed significant activity. The fuel retail sector has been actively engaged in upgrading and rebuilding its infrastructure. This encompasses everything from convenience stores and underground equipment to forecourts and car washes, all of which have seen a rise in activity. The industry has benefited from healthy fuel margins and increased in-store sales. Additionally, the demand for technicians has remained high, along with a corresponding rise in their wages. This combination of factors has fueled strong demand for Vontier’s products and services.
Vontier’s management highlighted that the level of refresh and rebuild activity in the fuel retail sector has surpassed their expectations. This success can be attributed to the strength and resilience of the U.S. economy. In my view, had the U.S. economy slipped into a recession, such robust performance in the fuel retail space would have been unlikely.
Looking Ahead
Looking towards the future, I believe Vontier is well-positioned to achieve significantly improved results, particularly starting from 2024.
Although inflation remains above the Federal Reserve’s 2% target, there’s a noticeable downward trend, with the CPI now hovering around 3%. It’s still premature for the Fed to claim victory over inflation, but the direction seems promising. For instance, October saw no month-over-month increase in consumer prices. Unless there’s an unexpected shift in economic indicators, the Fed could potentially start lowering interest rates next year. Recent minutes from the Federal Open Market Committee [FOMC] meetings suggest a change in their stance.
In the Fed’s September meeting, a “majority” of participants saw the possibility of further rate hikes. However, the tone appeared to shift in their latest gathering. The minutes indicate a consensus as “all participants agreed that the committee was in a position to proceed carefully.” This could imply a shift from an aggressive rate hike strategy to a more steady approach.
Further insights into the Fed’s outlook are anticipated in the coming weeks as policymakers comment on the direction of the economy. For now, market expectations for rate hikes are moderating. According to the CME’s Fed Watch Tool, 95% of traders now anticipate the Fed will maintain the current rate range in their December meeting, an increase from 75% a month earlier. Additionally, over half (53%) now expect the Fed to cut interest rates by 25 to 50 basis points by May 2024.
A scenario where interest rates stabilize or decrease could be particularly advantageous for Vontier. The mobility industry has already demonstrated resilience amidst rising interest rates, and a potential reduction in borrowing costs could further enhance its prospects. Such an environment may motivate operators of retail fueling sites and car washes to ramp up their capital expenditures, potentially leading to an uptick in rebuild and refresh activities. Consequently, Vontier could see meaningful growth opportunities, particularly as its clients might invest more in new technologies, such as connected solutions, to boost efficiency. These advancements could open new avenues for Vontier to expand its revenue and earnings.
Last year, Vontier secured major contracts to implement its iNFX payment solution and micro-services platform across over 20,000 Shell (SHEL) and Chevron (CVX) sites. Work on this project is set to continue through 2024. However, with an anticipated improvement in the business climate, I believe Vontier could be in line to continue winning more substantial orders from c-store customers in the coming year.
It’s important to highlight that Vontier’s own customer surveys are also signaling positive trends. In collaboration with the National Association for Convenience Stores, Vontier conducted a survey revealing that 85% of retailers plan to maintain or increase their capital investments relative to profits in 2024. With an improving business climate, more companies within the mobility industry might feel confident to elevate their capital expenditures in 2024, thereby potentially propelling Vontier’s growth.
The upcoming fourth quarter will mark the final period where Vontier’s financial results are impacted by the EMV sunset, with the influence of this factor expected to reach its zenith during this quarter. Starting from the first quarter of the following year, Vontier’s results are anticipated to normalize, potentially leading to more favorable year-over-year comparisons.
It’s important to note that Vontier started this year on a positive note, but as the EMV impact began to weigh in, its growth dipped into negative territory in both the second and third quarters. The positive figures we observed were primarily visible when considering core baseline sales, which excluded the EMV impact. A similar pattern is expected for the fourth quarter. Nonetheless, from the next year onward, Vontier’s growth trajectory is projected to improve significantly as the company moves past the EMV sunset’s influence.
Takeaway
In conclusion, the resilience of the U.S. economy in 2023, amidst rising interest rates, is mirrored in the solid performance of businesses like Vontier. As we look to 2024, with the possibility of declining interest rates, Vontier could find ample opportunities to grow its revenue and earnings. The company’s future, in my view, appears more promising than before.
Vontier’s stock has seen an impressive rally this year, soaring by nearly 70%. I believe this uptrend may persist as the company continues to grow its revenue and earnings. However, when it comes to valuation, the stock doesn’t present an overly attractive buying opportunity. Currently, it’s trading at about 11.7 times forward earnings estimates, surpassing its five-year average of 10.2x, according to data from Seeking Alpha. This elevated valuation is reflected in its D+ Valuation Grade from Seeking Alpha’s Factor Grades. Contributing factors to this grade could include its high forward PEG ratio (non-GAAP) of 4.10x and a Price to Book ratio [ttm] of 6.78. Based on this pricing, I would categorize the stock as a ‘hold’, suggesting investors might want to wait for a more favorable entry point.
It’s also important to consider potential risks associated with Vontier. I have discussed an optimistic scenario with declining interest rates in this article. However, should inflation start rising again, prompting the Federal Reserve to implement further rate hikes to control inflation, this could negatively impact economic growth. In such a scenario, the mobility industry might face challenges, potentially leading to reduced spending rather than an increase. This shift could adversely affect Vontier’s earnings, potentially leading to a decline in its revenue and profits in the coming year.
