The auto industry is stuck in limbo.
Vontier
stock might just be getting out of it.
For car companies, it hasn’t been easy being stuck someplace in the transition to electric vehicles. The old-fashioned combustion engine is on its way out, creating a major headwind for traditional auto companies. But the transition to EVs has hit some roadblocks, creating uncertainty about where it goes next.
Vontier (ticker: VNT), which makes a variety of gear for both gas-powered and electric vehicles, has been stuck in a different kind of transition. It was spun out of
Fortive
(FTV) in 2020, after Fortive itself was split off from Danaher in 2016. That has left Vontier in an in-between state as investors try to figure out what the company is and where its business is going. Shares have dropped 8% since peaking in September 2021, even after gaining more than 70% this year.
Despite the lackluster returns since the spin, Vontier is a stock that can win no matter what kind of car people decide to drive. The Raleigh, N.C.–based company specializes in software and hardware for every stage of driving. It sells gas pumps to gas stations and convenience stores as well as the card readers and point-of-sale software that make them work. It helps commercial fleet owners know how their equipment is being used. It also sells the tools mechanics need to fix all the vehicles. Its products are in hundreds of thousands of locations, mainly in North America and Europe.
Coming from Danaher means Vontier applies the Danaher Business System, or DBS, to its business. That essentially means small bolt-on acquisitions to boost growth while improving profit margins using lean manufacturing techniques. Among industrial investors, DBS is the gold standard—and it has also paid off for shareholders. Danaher stock has gained more than 140% over the past five years, outpacing the S&P 500’s 73% rise.
Despite its storied ancestry, Vontier is only starting to hit its groove. One problem has been perception. Vontier sells gas pumps to convenience stores and gas stations, and as cars go electric, the concern is that no one will need gas pumps. That isn’t quite right. Heavy-duty trucking might never go fully electric, and Vontier technology can dispense hydrogen, natural gas, or anything else trucks need.
What’s more, just 1% or so of the total number of vehicles on U.S. roads are battery-electric vehicles, and even if 40% of light vehicles sold in the U.S. were all-electric by 2023, they would represent roughly 10% of the total fleet. Vontier will benefit from that transition through its EV-charging business. “We’ve actually got 50,000 plugs under management,” says CEO Mark Morelli. “That’s one of the leading platforms [based on the] number of plugs under management.”
Another technology transition has caused some bumps: the shift from credit-card swipes to chip readers. Vontier makes all the equipment and software for card readers. The switch to chips provided a nice $500 million boost to sales from roughly 2020 through 2022, but when that surge ended, Vontier’s revenue stagnated. Over the coming two years, Wall Street sees sales growth returning to about 4% a year on average. “The stock is pricing in revenue declines, while we see growth ahead,” UBS analyst Robert Jamieson writes. He rates shares Buy and has a $38 price target for the stock, up 14% from a recent $33.43 a share.
The Danaher business system—or Vontier business system, as the company refers to it—will turn those sales into earnings. The approach relies on decentralized, hands-on management, and pulls together people from all levels of the company. As a result, operating profit margins should hit 22% in 2024, above the 16% average for industrial companies in the
S&P 500.
For the coming two years, Wall Street expects earnings growth of about 10% a year on average, to $3.45 a share in 2025.
Vontier’s valuation seems too low for that kind of growth. It trades at just 10.7 times 2024 earnings, below the S&P 500’s 18.2 times, where earnings have grown at about 12% a year on average for the past few years. Jamieson’s $38 target would put Vontier’s valuation at 12 times. If it can get to 15 times, it would be worth $52 a share, up 50% from recent levels.
Vontier’s technologies will be around for decades, and the company will continue to adapt to the rules of the road. It’s time to buy the stock.
Write to Al Root at [email protected]
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