Positioning and workflow technology company Trimble(NASDAQ: TRMB) isn't the easiest company to understand. Still, a deeper look into its long-term growth prospects reveals a company on track to deliver significantly improved earnings and cash flow in the coming years.
Here's why Trimble is an outstanding stock to buy now.
Trimble falls into favor
Despite trading in negative territory when compared to January 2022, Trimble's stock is up 34% in 2024 and a whopping 75% over the last year. The stock jumped 15% since Nov. 5 after management raised its full-year revenue and earnings margin guidance in the company's third-quarter earnings report.
The rise in guidance certainly cheered the market, but here's the thing: Headline guidance isn't the best way to judge progress at the company or even evaluate it.
The key metric that matters to Trimble
While revenue and earnings are important (try to tell shareholders enjoying the share price bump otherwise), the crucial number to follow with Trimble is its annualized recurring revenue (ARR).
Management calculates its ARR by taking its "subscription and maintenance and support for the current quarter and adding the portion of the contract value of all our term licenses attributable to the current quarter, then dividing that sum by the number of days in the quarter and then multiplying that quotient by 365."
In plain English, it represents the annual run rate of its recurring revenue and is, therefore, the critical determinant of its free cash flow (FCF) growth.
Why ARR is set to grow
Management continues to expect its ARR to grow 11% to 13% for the full year -- although management did note on the recent earnings call it was now "biased" toward the upper end of the range. This impressive growth rate is driven by the increasing adoption of its higher-margin software and services offerings.
The company's roots lie in exact positioning and sensing technology hardware used in construction, geospatial mapping, transportation/logistics, and agriculture. However, its future lies in becoming an increasing part of its customers' daily workflow by helping them plan, model, and analytically optimize their daily operations using the data captured by its hardware.
Examples include precise and timely routing of logistics fleets, the precise management of construction/infrastructure projects (an activity notorious for cost overruns due to imprecise execution), or using geospatial data to minimize waste. In a nutshell, Trimble's solutions act as a connection between the digital and physical worlds, to enable the latter to perform in line with what's modeled, monitored, and analyzed in the former.
Dividing its revenue into three segments, Trimble is growing its core architecture, engineers, construction, and owners (AECO) ARR at an impressive rate. While the transportation and logistics performance appears relatively disappointing, it should be noted that a slowing demand has significantly challenged the freight markets. Indeed, CEO Rob Painter described the freight market as continuing to be in a "recession."
Trimble Segment | Q3 ARR | Organic ARR Growth |
|---|---|---|
Architecture, Engineers, Construction, Owners (AECO) | $1.21 billion | 18% |
Field Systems | $328 million | 18% |
Transportation & Logistics | $649 million | 5% |
Total | $2.187 billion | 14% |
Data source: Trimble presentations.
Trimble improves its business
The growth in ARR isn't just due to the increasing adoption of its solutions; it also comes down to management's concerted efforts to simplify the company and focus on its core businesses, where it competes best.
As Painter noted, Trimble has divested 22 businesses over the last four years. Prominent deals include the creation of a joint venture, PTx Trimble, with agricultural machinery company Agco (NYSE: AGCO), from which Trimble received $2 billion in cash and a 15% stake in the joint venture. In addition, in September, Trimble announced it will sell its global transportation telematics business to Platform Science in return for a 32.5% stake in the expanded company.
Both deals are examples of Trimble's management restructuring the company to focus on growing in its core end markets.
Image source: Getty Images.
A stock to buy
Trimble's restructuring strategy is working, and its growing software/services revenue is improving its profit margins. ARR is growing at a mid-teens rate, and Wall Street sees that dropping into an increase in FCF from about $500 million in 2024 to $817 million in 2026.
With the adoption of data analytics and digital technology just taking off in the industrial sector, Trimble has a long pathway of growth ahead, and the stock is highly attractive for growth investors.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Trimble. The Motley Fool has a disclosure policy.
