Vontier Ends 2022 With Solid Fourth Quarter

Narrow-moat Vontier’s fourth-quarter adjusted EPS of $0.81 beat our estimate by $0.08 as the company benefited from an easing in supply chain constraints. After rolling our model forward one year, we’ve bumped our fair value estimate for Vontier to $37 from $36.50, mostly due to time value of money. The stock closed up nearly 10% following the earnings release, but we continue to see the name as undervalued, with shares trading at a roughly 30% discount to our updated fair value estimate.

Compared with the prior-year period, Vontier’s fourth-quarter core revenue was up 10%. Mobility technologies core revenue increased by roughly 13%, driven by strong growth at DRB Systems as well as low-double-digit growth at GVR. Diagnostics and repair technologies core revenue grew 3%, including mid-single-digit same-store sales growth at Matco. Vontier’s adjusted core operating margin compressed by 110 basis points due to unfavorable mix, margin dilution from the Invenco acquisition, and growth investments at Driivz. The price/cost spread was positive in the fourth quarter.

For full-year 2023, management anticipates core revenue to be down low- to mid-single digits, adjusted operating margin to be down 60-80 basis points, and adjusted EPS to be in the range of $2.73 to $2.83. We note that the outlook bakes in a roughly $300 million headwind due to the sunset of Europay, Mastercard, and Visa, or EMV-related sales. Excluding EMV-related sales, Vontier expects core revenue to be up midsingle digits and adjusted operating margin to be up 180-200 basis points.

In 2022, Vontier deployed over $325 million in share repurchases, and we expect the firm to continue repurchasing shares in 2023. Given our view that Vontier’s stock has been undervalued, we believe this is a good use of capital. Management also said on the earnings call that it expects to pay down around $150 million to $200 million of debt in 2023, targeting a net leverage ratio of 2.5 to 3.0 times by the end of the year.