Trimble (NASDAQ:TRMB) is a hardware, software, and services technology company that serves the full gamut of real assets with its innovative solutions, whether they are farmland, buildings, infrastructure and utilities assets, or even natural resources.
Unlike many other PropTech companies, TRMB is a mature business that brings over four decades of experience to the table and is also a highly profitable business with a relatively mild Price to Earnings multiple (24.86x). That said, the company is still highly innovative and invests a whopping 15% of revenue into research and development while claiming to provide clients with 25-50% efficiency gains and 30% cost savings over traditional real asset solutions.
Its technologies enable real asset focused business to optimize the productivity of their assets. These solutions include:
- software and hardware packages to optimize the full cycle for crop farmers, enabling them to maximize yields.
- buildings solutions that lead to safer, faster, and greener construction, as well as improved architectural and engineering design solutions.
- high tech geospatial solutions that improve the function of railways, tunnels, mining operations, fuel storage assets, dams, roads, and land mapping operations.
- software and hardware solutions for infrastructure assets ranging from water and wastewater plants to internet assets, energy assets, electric and gas utilities, airports, shipping ports, roads and bridges (including lane-changing autonomous vehicle technology), and railroads.
- Forestry and mining technology solutions.
In the rest of this article, we will detail three reasons why TRMB could be a great long-term investment.
#one. Poised To Profit From The Rush To Real Assets
As an innovative technology solutions provider for a vast array of real assets, TRMB is poised to profit immensely from the rush to real assets that is currently underway and which we expect will accelerate in the years to come.
Given that inflation is soaring to its highest levels in four decades and interest rates remain near historic lows, the real interest rate is about as negative as it has ever been. This bodes extremely well for cash flowing real assets as it means that the replacement cost of these assets is soaring while also making their income generating capability extremely attractive relative to the yields on bonds.
Furthermore, reliable income sources are in high demand as developed economies age and soaring growth in developing economies has resulted in a severe shortage of essential infrastructure.
On top of that, heavily leveraged government balance sheets are leading to increased privatization of infrastructure assets and – last, but not least – the 4th industrial revolution is driving aggressive modernization of infrastructure and creating plenty of new technology-focused business opportunities along with.
All of this should drive strong demand for TRMB’s solutions in the years to come, in particular from the recent infrastructure bill in the United States. It is in a unique position to profit from servicing both the real asset businesses of today as well as the increasingly “smart” real assets of tomorrow.
#two. Strong Competitive Advantages
TRMB has spent and continues to spend a lot on research and development, giving it an impressive intellectual property library of over 1,000 patents.
One of TRMB’s key differentiators is its capability and emphasis on leveraging and combining geospatial/positioning technology with productivity technologies to maximize synergies and efficiencies for customers. By using GPS and sensor technologies in the field in combination with its proprietary software solutions, it is able to connect the physical and digital world at a level that few other companies can match.
Another three big competitive advantages for the company are its:
- Network effects
- Cross-selling capability
- Cash flow strength
Thanks to its over four decades of doing business, TRMB has built a large client network and a strong reputation in its industry. As a result, it enjoys significant network and economies of scale advantages over younger and smaller competitors.
In fact, over 70% of the top 100 geospatial companies use TRMB, over 10,000 surveyor and mapping firms in North America are TRMB customers, there are over 10 million users of TRMB’s construction Connect system, it has joint ventures with construction and geospatial equipment giants Nikon (OTCPK:NINOF), Caterpillar (CAT), and Hilti, over 155 million acres of farmland use TRMB’s technology solutions, 115,000 farmers subscribe to its services, 99% of the top 200 trucking fleets in the US use TRMB technology, and over 2 million transportation infrastructure assets are managed with TRMB technology.
Furthermore, with its presence in such a wide array of industries as well as successful government contracts, TRMB is able to cross-sell its products and services, making it a stickier and more convenient one-stop-shop for many of its clients.
It is also able to leverage this breadth to attract collaborative tech partnerships with leading companies like Microsoft (MSFT), which it recently partnered with to advance cloud solutions for real assets.
Finally, the fact that it is generating strong profits and free cash flow – underpinned by a large amount of recurring revenue – means that it can (and does) reinvest in itself without having to rely on the support of capital markets to fuel growth. Many younger, unprofitable PropTech competitors do not benefit from this.
As a result, it is positioned to increasingly dominate the real asset services industry as automation and data analytics increasingly driving performance in these industries.
#3. Wonderful Company Trading At A Fair Price
While this all sounds great, what is the value proposition like?
TRMB looks pretty attractively valued based on historical valuation multiples as it trades at a clear discount on an EV/EBITDA, P/E, and P/FCF basis relative to the company’s five-year averages:
|Valuation Metric||Current||5-Yr Average|
Based on these numbers, the stock looks quite cheap. Furthermore, as we stated previously, we expect its growth rate to accelerate in the coming 5-10 years as trillions of dollars pour into the real asset space due to economic, geopolitical, and technological factors. On top of that, TRMB is also positioned to benefit from this trend more than competitors given its technological breadth and depth. 2021 already showed a strong uptick in growth as businesses increasingly adopt advanced technologies.
In 2019, TRMB only grew revenue by 5.2% and then in 2020 it declined by 3.6%. In 2021, it grew by 16.1%. EBITDA growth jumped to 17.3% in 2021 compared to 7.5% growth in 2020 and 9.3% growth in 2019. Normalized earnings per share grew by 19.3% in 2021, up from 12.1% in 2020 and 2.6% growth in 2019. So, if anything , we think that shares should trade at a premium to their recent history.
While rising interest rates are obviously a concern, the good news for TRMB is that it is already generating a lot of free cash flow today instead of pointing to profits in the distant future. Even better, it is generating more free cash flow than earnings each year, reflecting the cash efficient nature of the business and its ability to push working capital into negative territory thanks to its increasing weight towards asset-light software that generates recurring revenues. Furthermore, the primary cause of higher interest rates – inflation – should be a tailwind for TRMB, as its main pitch to customers is its ability to improve efficiencies, solve supply chain problems, reduce raw material and labor costs, and thereby battle inflationary forces.
Another symptom that suggests TRMB is undervalued is management’s accelerated allocation of cash flow towards buybacks even as it maintains a hefty R&D budget. Share repurchases in Q4 2021 were $40 million, representing over a quarter of cash flow from operations and up from a meager $3.6 million in Q4 2020. This is especially prudent given that the share price has pulled back substantially from its all-time highs seen in mid-2021.
Risks To Keep In Mind
While TRMB is much lower risk than the two previous opportunities we mentioned (Matterport (MTTR) and Opendoor Technologies (OPEN)), it still faces some risk. The most obvious of these is geopolitical risk given that TRMB generates roughly half of its revenue from outside of North America, with a sizable percentage coming from Europe and Asia.
Additionally, as a company that is betting heavily on its ability to remain the technological leader across a broad swatch of real asset sectors, it will likely have to invest increasingly aggressively to maintain its edge over more concentrated and more nimble competitors trying to overtake it in specific niches. While TRMB has the cash flow capability to handle this, it could mean that profit margins get pinched in the future and it may have to curtail its share repurchases and even issue equity, thereby diluting shareholders.
Another risk is one that is common to all innovative companies: simply that TRMB may misallocate capital by investing in technologies that do not translate into successful innovations either on the technical side or the profitability side. While TRMB certainly does not look overpriced here, it is not extremely cheap either unless management can successfully ignite growth. The extent to which it will be able to do that is uncertain, meaning that it does not come with a wide margin of safety.
TRMB is more than simply a PropTech company: it is a real asset technology powerhouse, with four decades of experience and a very strong position across a wide swath of real asset classes.
On top of that, the company continues to invest its substantial free cash flow into further growing the company via acquisitions, partnerships, and research and development.
Last, but not least, it is trading at a reasonable valuation – especially compared to many other technology companies today – and could deliver attractive risk-adjusted returns as a Growth-At-A-Reasonable-Price investment. To quote the Oracle of Omaha, we believe this is a case of a wonderful company trading at a fair price rather than a fair company trading at a wonderful price.
We have recently been covering numerous opportunities in the Property Technology sector for our members at High Yield Investor and found this one to be one of the most attractive on a risk-adjusted basis.