This Growth Stock Is Trading at Value Prices
Key Points
Profit margins are expanding in line with a shift to higher-margin software and services revenue.
This stock is undervalued compared to its strong long-term growth outlook.
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Workflow technology company Trimble (NASDAQ: TRMB) is a rare breed. It's a highly cash-generative company growing its key metric at a mid-teens pace, and with ongoing margin expansion and market growth opportunities. Yet, it trades on highly attractive valuation multiples. As such, it's an excellent growth-at-a-reasonable-price (GARP) stock for investors willing to look beyond the headline numbers.
Trimble's growth prospects
The company's origins lie in hardware and precision technology, helping construction/infrastructure, geospatial, agriculture, and transportation customers with precise positioning. However, its present and future lie in combining those products with software that consolidates the positioning data, analyzes it, and produces actionable insights that improve its customers' daily workflow.
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It's a growth opportunity driven by its customers' increasing adoption of digital technologies. The transition to a more software- and services-based model has steadily increased its profit margins and driven consistent mid-teens annualized recurring revenue (ARR) growth.
Data by YCharts. EBITDA = earnings before interest, taxes, depreciation, and amortization.
Why ARR matters to Trimble
As CFO Phil Sawarynski noted at a recent conference, 65% of Trimble's revenue is now recurring, and 80% of its revenue is software and services. As such, the mid-teens growth in ARR is translating into free cash flow (FCF), as recurring subscriptions are relatively easy to collect and model.
The value added by its solutions (think of construction projects tightly managed according to a model, infrastructure projects like pipelines precisely managed, or transportation fleets optimized in real time) means that management expects 13% to 15% organic adjusted ARR growth in 2025.
Additionally, a growth kicker is emerging from the increasing infusion of artificial intelligence (AI) into its analytical capabilities.
Image source: Getty Images.
Wall Street expects Trimble's FCF to grow at a 26.6% annual rate from 2024 to 2027, putting Trimble on 17.6 times FCF in 2027. Management aims to return a third of FCF to investors via buybacks. All told, the valuation is far too cheap for a company with such excellent long-term growth prospects.
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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.
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