Scientific & Technical Instruments company Trimble stunned Wall Street today as it plummeted to $55.54, marking a -5.5% change compared to the S&P 500 and the Nasdaq indices, which logged 0.7% and 1.2% respectively. TRMB is -21.34% below its average analyst target price of $70.61, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Trimble has lagged behind the S&P 500 by -16.0%, moving -29.9%.
Trimble Inc. provides technology solutions that enable professionals and field mobile workers to enhance or transform their work processes worldwide. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.
Trimble's trailing 12 month P/E ratio is 28.5, based on its trailing Eps of $1.95. The company has a forward P/E ratio of 19.2 according to its forward Eps of $2.9 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 26.5 as of third quarter of 2022. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
TRMB’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Trimble, we obtain a PEG ratio of 2.22, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on TRMB's margins:
| Date Reported | Revenue ($) | Cost of Revenue ($) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 3,659,100,000 | 1,536,500,000 | 58.01 | -1.31 |
| 2021-01-01 | 3,147,700,000 | 1,297,600,000 | 58.78 | 2.28 |
| 2020-01-03 | 3,264,300,000 | 1,388,200,000 | 57.47 | -0.03 |
| 2018-12-28 | 3,108,400,000 | 1,321,500,000 | 57.49 | n/a |
- Average gross margin: 57.9%
- Average gross margin growth rate: 0.3%
- Coefficient of variability (higher numbers indicating more instability): 1.1%
We can see from the above that Trimble's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
Trimble's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 750,500,000 | -46,100,000 | 704,400,000 | 14.5 |
| 2021-01-01 | 672,000,000 | -56,800,000 | 615,200,000 | 19.22 |
| 2020-01-03 | 585,000,000 | -69,000,000 | 516,000,000 | 23.12 |
| 2018-12-28 | 486,700,000 | -67,600,000 | 419,100,000 | n/a |
- Average free cash flow: $563,675,000.00
- Average free cash flow growth rate: 18.9%
- Coefficient of variability (lower numbers indicating more stability): 21.9%
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, TRMB is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the third quarter of 2022, the mean P/B ratio of the technology sector is 5.57, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Trimble's P/B ratio is 3.6, telling us that the market value of the company exceeds its book value by a factor of 3, but is still below the average P/B ratio of the Technology sector.
As of third quarter of 2022, Trimble is likely undervalued because it has an average P/E ratio, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with an upwards trend. The stock has mixed growth indicators because of its consistently strong gross margins with a stable trend, and an above average PEG ratio. We hope this analysis will inspire you to do your own research into TRMB's fundamental values -- especially their trends over time.
