Stock Story -
Electronic equipment provider Vontier (NYSE:VNT) fell short of analysts' expectations in Q2 CY2024, with revenue down 8.9% year on year to $696.4 million. Next quarter's revenue guidance of $727.5 million also underwhelmed, coming in 5.4% below analysts' estimates. It made a non-GAAP profit of $0.63 per share, down from its profit of $0.67 per share in the same quarter last year.
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Vontier (VNT) Q2 CY2024 Highlights:
- Revenue: $696.4 million vs analyst estimates of $746.4 million (6.7% miss)
- EPS (non-GAAP): $0.63 vs analyst expectations of $0.70 (10.6% miss)
- Revenue Guidance for Q3 CY2024 is $727.5 million at the midpoint, below analyst estimates of $768.7 million
- The company dropped its revenue guidance for the full year from $3.07 billion to $2.95 billion at the midpoint, a 3.9% decrease
- EPS (non-GAAP) Guidance for Q3 CY2024 is $0.69 at the midpoint, below analyst estimates of $0.78
- EPS (non-GAAP) Guidance for the full year is $2.90 at the midpoint, missing analysts' estimates by 6.2%
- Gross Margin (GAAP): 48.2%, up from 45.5% in the same quarter last year
- Free Cash Flow of $22.3 million, down 68.7% from the previous quarter
- Organic Revenue fell 3% year on year (-1.7% in the same quarter last year)
- Market Capitalization: $6.06 billion
Internet of ThingsIndustrial Internet of Things (IoT) companies are buoyed by the secular trend of a more connected world. They often specialize in nascent areas such as hardware and services for factory automation, fleet tracking, or smart home technologies. Those who play their cards right can generate recurring subscription revenues by providing cloud-based software services, boosting their margins. On the other hand, if the technologies these companies have invested in don’t pan out, they may have to make costly pivots.
Sales GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Regrettably, Vontier's sales grew at a weak 1.9% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Vontier's history shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 1.3% annually. Vontier isn't alone in its struggles as the Internet of Things industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time.
We can dig further into the company's sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Vontier's organic revenue was flat. Because this number aligns with its normal revenue growth, we can see the company's core operations (not M&A) drove most of its performance.
This quarter, Vontier missed Wall Street's estimates and reported a rather uninspiring 8.9% year-on-year revenue decline, generating $696.4 million of revenue. The company is guiding for a 5% year-on-year revenue decline next quarter to $727.5 million, a deceleration from the 2.9% year-on-year decrease it recorded in the same quarter last year. We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.
Operating MarginOperating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Vontier has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 18.4%. This result isn't surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Vontier's annual operating margin rose by 1.6 percentage points over the last five years, showing its efficiency has improved.
This quarter, Vontier generated an operating profit margin of 16.4%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.
EPSAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Vontier's EPS grew at an unimpressive 5.9% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.9% annualized revenue growth and tells us the company became more profitable as it expanded.
Diving into the nuances of Vontier's earnings can give us a better understanding of its performance. As we mentioned earlier, Vontier's operating margin was flat this quarter but expanded by 1.6 percentage points over the last five years. On top of that, its share count shrank by 7.7%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Vontier, its two-year annual EPS declines of 2.4% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.
In Q2, Vontier reported EPS at $0.63, down from $0.67 in the same quarter last year. This print missed analysts' estimates. We also like to analyze expected EPS growth based on Wall Street analysts' consensus projections, but there is insufficient data.
Key Takeaways from Vontier's Q2 ResultsWe enjoyed seeing Vontier beat analysts' EPS guidance expectations for next quarter. On the other hand, its full-year revenue guidance missed and its revenue guidance for next quarter fell short of Wall Street's estimates. Overall, this was a bad quarter for Vontier. The stock traded down 5.5% to $37.10 immediately following the results.
