Work process technology company Trimble(NASDAQ: TRMB) is one of the most compelling stocks in the market, and its recent merger and acquisition activity is only strengthening the case for the stock. The recent announcement of a deal with agricultural equipment company AGCO(NYSE: AGCO) (whose brands include Massey Ferguson, Fendt, and Valtra) is a significant plus and puts both companies in a better position to compete with Deere.
Here's why the deal is excellent news for Trimble investors.
How Trimble makes money
Trimble offers highly precise positioning hardware and software technology, allowing customers to model and plan their daily activities. Given the explosion of data analytics and the mass of data generated by its customers, it's only natural that Trimble should become an even greater part of its customers' daily workflow by offering analytics and optimization solutions.
Examples include trucking fleets in real time, precision agriculture guiding equipment, and precise positioning on construction and infrastructure projects. The technology company breaks out its revenue across four segments. The chart below shows a breakdown of its operating income across these segments in 2022.
Data source: Trimble presentations.
Strengthening its business through deals
If there is a concern about Trimble, it is whether it can continue growing in relatively disparate markets. However, the deals in 2023 have positively changed its growth profile and de-risked the company. In April of this year, Trimble completed an agreement to strengthen its relatively low-margin transportation business in 2023 (it had a 9.7% operating income margin in 2022 compared to 27% to 34% for the other three segments). By buying a European cloud-based transportation management solution company, Transporeon, Trimble has expanded geographically and accelerated its analytics capability and recurring revenue to its transportation business.
Its hardware-dominated geospatial business is a solid legacy business. Meanwhile, its buildings and infrastructure business has exciting growth prospects from a combination of increased spending and increasing use of real-time data in construction projects. The latter can significantly reduce construction costs and waste.
Image source: Getty Images.
The deal with AGCO
With transportation strengthened, the geospatial business offering solid, if unexciting, growth prospects, and buildings and infrastructure well-positioned, the remaining question mark concerns its resources and utilities (primarily agriculture) business. There's no doubt that precision agriculture is a hot market. However, it's a market led by Deere's aggressive investment in a comprehensive range of solutions.
Over the past two decades, Deere has bought and developed precision agriculture businesses that monitor, guide, automate, analyze, and autonomously control farming activity. It's even bought a farm management software business, Harvest Profit, to help farmers forecast profitability based on their decisions.
Deere's leadership has encouraged its rivals to follow, notably CNH Industrial (which owns Case and New Holland) and its $2.1 billion acquisition of Raven Industries in 2021 to add precision agriculture. These ongoing investments by Deere and CNH created a threat to one of Trimble's core markets and raised a question over the competitive future of its agriculture business.
Trimble and AGCO tie the knot
Fast forward to the latest industry development, and that question appears to have been answered. Trimble will:
- Receive $2 billion in cash and get a 15% share in a joint venture with AGCO that combines each company's precision agriculture businesses.
- Use $1.1 billion of the $1.5 billion net proceeds to repay debt and have cash left over for share repurchases.
- Retain its positioning services business and benefit from recurring revenue from the joint venture.
In addition, the joint venture will sell its solutions on a mixed fleet business, meaning it can be applied to competitors' equipment, so Trimble's technology won't be tied entirely to AGCO's equipment.
Image source: Getty Images.
Why the deal makes sense for Trimble
The deal helps de-risk Trimble from rising competition in the precision agriculture market and brings in $2 billion in cash and a 15% share in a joint venture with excellent growth prospects. Management can now focus on growing its core buildings and infrastructure business and integrating Transporeon into its transportation business.
As such, throughout 2023, Trimble has expanded its analytics capability (Transporeon) while de-risking its agriculture business through planning a joint venture with AGCO. It remains an attractive stock to buy for investors.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Deere and Trimble. The Motley Fool has a disclosure policy.
