Positioning and workflow technology company Trimble (NASDAQ: TRMB) has a bright future, but it's not the most well-known or valued company. There are a variety of reasons for this, but investors willing to dig deep into this stock could make an extraordinary profit. Here's what you need to know before you buy.
Trimble is not a consumer business.
If you work in the construction, transportation, agriculture, or mapping industries, you may have come across Trimble hardware and software solutions. For those unfamiliar with the company, it has its origins in precision positioning hardware, but in the future it hopes to expand its software and service solutions to its customers.
More than just providing positioning and sensing technology, Trimble's software and services help customers plan and model operations (such as planning routes for trucking fleets) and analyze and optimize daily operations (such as complex construction sites where something changes every day).
With this knowledge, and the understanding that software/recurring revenue carries higher margins and is becoming an increasingly important part of customers' daily workflow, it becomes much easier to understand the company's potential growth prospects.
Annual recurring revenue and cash flow, not revenue and profit
Trimble's annual recurring revenue (ARR) and cash flow generation provide a better understanding of the company's growth trajectory than just looking at revenue and profits. Management defines ARR as the “estimated annual value of recurring revenue.” ARR includes quarterly subscription and maintenance, and quarterly license contract value, and then annualizes those figures.
Precision agriculture.
Image source: Getty Images.
So rather than just looking at the leading revenues and profits on Trimble's income statement, it really does paint a good picture of the evolution of Trimble's business.
The difference is illustrated in the table below showing Trimble's guidance for 2024. Notice that while mid-single-digit organic revenue growth is adequate, Trimble's ARR is growing at a low double-digit rate.
Trimble Guidance
2024
Adjusted organic revenue growth
5%-7%
Organic ARR Growth
11%-13%
Data source: Trimble presentation.
ARR is also a better indicator of what kind of free cash flow (FCF) Trimble will be able to generate in the future, which can be seen by looking at Wall Street analyst consensus on revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) growth. While these numbers shouldn't be taken as absolute, they can help show how underlying ARR growth can translate into increased FCF generation over time.
The consensus is for FCF to be $500 million in 2024, $648 million in 2025, and $869 million in 2026. To put these numbers into context, based on its current market cap of $13.7 billion, Trimble would trade at 15.8x FCF in 2026. That's several years away, but the company's ARR growth remains strong, and increasing margins and cash flows from software and recurring revenue growth should warrant increased FCF conversion.
All of this is hidden by focusing only on Trimble's revenue growth.
Wall Street analyst consensus
Estimated for 2025
Estimated for 2026
Revenue Growth
3.1%
6.6%
EBITDA Growth
5.7%
10.3%
Free cash flow growth
29.6%
34.1%
Data source: marketscreener.com. EBITDA = Earnings before interest, taxes, depreciation and amortization.
Trimble's unresolved audit matter
Another reason Trimble may be overlooked as a “buy” by many investors is the concern over issues with EY's audit of its fiscal 2023 financial statements. This was disclosed in May, when Trimble's financial officer Phil Sawalinski said at the time that “neither EY nor Trimble had sufficient documentation of certain IT and other controls over revenue-related systems and processes.” Chief Financial Officer David Burns said, “This is simply about internal controls. Neither EY nor we have identified any issues with our numbers.”
CEO Rob Painter reiterated that view in August, and expects the EY re-audit to be completed in a month or so. While there's still an element of risk, there's nothing to suggest so far that it will have a financial impact on Trimble.
An investor sitting at a desk and smiling.
Image source: Getty Images.
Stocks to buy
Trimble's 2024 ARR growth forecast of 11%-13% is all the more impressive considering one of the company's end markets (freight transportation) is in a downturn, demonstrating the importance of the company's solutions to improving customers' daily workflows and the potential for long-term growth.
Overall, this stock is an attractive buy for investors who want to buy before the wider market takes notice. The company has performed extremely well in a challenging environment, and FCF is expected to improve significantly over the next few years, making the current valuation very attractive.
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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.
