Vontier Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Vontier is a global industrial technology company that focuses on mobility, automation, and energy technologies, providing software, services, and equipment for the retail, commercial, and industrial fuel distribution industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Vontier Corporation operates as a global industrial technology company, primarily focusing on precision measurement and control technologies for mobility, infrastructure, and energy transition. Its operations are organized into three reportable segments: Mobility Technologies, Environmental & Fueling Solutions, and Repair Solutions, catering to the needs of its diverse client base.

Mobility Technologies: This segment provides a variety of solutions, including hardware and software offerings, that are intended to enhance mobility operations, such as fueling, tolling, and parking systems, primarily to serve the mobility markets globally.
Environmental & Fueling Solutions: This segment focuses on providing solutions for the retail, commercial, and industrial fuel distribution markets. These solutions are designed to handle fuel transactions, compliance, and environmental monitoring, encompassing equipment, software, and services for fuel management.
Repair Solutions: This segment provides diagnostic and repair equipment and related software and services, including those used for vehicle inspections, collision repair, and tire services, primarily for use within the auto service and repair industries.

Vontier’s business spans across a fairly wide variety of industries and market segments. To make sense of its current landscape and future direction it is very important to analyse each sector separately. They have more than 2000 patents but many are based in software or a mix of software and hardware.

Vontier has experienced significant organizational changes, including a restructuring in 2022, that resulted in the elimination of some managerial roles, but also the integration of new leadership. This reflects the company’s adaptability to changing market conditions and strategic priorities.

Competitive Landscape

The company faces competition across its three segments from a variety of players:

Mobility Technologies: Competition comes primarily from other payment and point-of-sale solution providers. Technological innovation and rapid shifts in consumer preferences play a major role in this competitive landscape.
Environmental & Fueling Solutions: In this segment, Vontier competes with other fuel dispensing and management companies, where technological innovation and regulatory compliance are key differentiators.
Repair Solutions: Here, competition arises from diagnostic and repair equipment manufacturers, where having a broad product offering and strong distribution networks are important for success.

Vontier is present in many industries, ranging from oil and gas to software, this is the cause of why it’s difficult to compare them to others, and because they don’t necessarily compete in the same area.

A lot of their patents are in software and technology and can be easily changed because of new inventions.

Financial Analysis

Vontier’s financials provide insights into the company’s revenue generation, profitability, and overall financial health.

Revenue Distribution: A significant portion of Vontier’s revenues comes from the Mobility Technologies segment, reflecting the importance of this sector to the company’s overall operations. The other segments also contribute significantly to the overall revenue. Vontier’s geographic diversity is mainly in North America, Asia, Europe, and Latin America.
Profitability: Over the past three fiscal years (2020-2022), Vontier has demonstrated decent profitability across its segments. Gross profit margins have hovered around the 50% mark, which is fairly good, with operating profit margins between 10 and 14% and net profit margins of around 7-9%. Return on equity is also in line with these margins.

Net income is heavily impacted by special charges and non operating items that vary a lot year-to-year, the trend in underlying operations can be better judged by operating income.

Financial Health: Vontier’s balance sheet shows positive signs as well. A current assets to current liabilities ratio of 1.4 indicates good liquidity. Total debt is $2.7 billion, with $1 billion of it being long term debt. Overall, the debt numbers are adequate compared to their profitability and current assets to meet those obligations. Share buyback program was initiated in May of 2022 to buy up to $500 million in company’s stock over a three-year period, and during the 3 months of september 2022 they purchased $20.4 million of company stock, which shows some confidence in future performance.

Although profitability has been good overall, operating profit margins for the Mobility and Repair segments have been significantly lower than those of the Environmental & Fueling Solutions segment, implying that Vontier might benefit from shifting focus towards the higher-margin segment.

Vontier has a decent balance sheet with enough liquidity, but could be impacted by a significant and unexpected economic shock to operations.

Moat Assessment: 2 / 5

Vontier’s economic moat can be described as narrow. Here is why:

Intangible Assets: While Vontier has a broad array of patents and brands, particularly in their established product lines, the sustainability of those assets are questionable due to the nature of a rapidly changing technological landscape.
Switching Costs: Switching costs provide some protection for the company’s services but it’s not extremely high in all areas of business, and a lot of competitors are trying to make the process of switching from them seamless. The value of switching is not so high that it gives them great pricing power or repeat business that is impossible to steal by competitors.
Network Effects: Vontier does not currently possess a significant network-based moat.
Cost Advantages: Some parts of their business, such as their supply chains for gasoline distribution and other services and products in the Energy and Fuel sector, appear to have moderate cost advantages, but these are susceptible to changes in the long run, by competitors changing suppliers and improving logistical networks. Also, there may be some cost advantages due to specialized niche areas, but those segments usually dont have enough growth to create high revenue.

In conclusion, the company seems to have some advantages and moats, but nothing is extremely compelling or very hard to break for competitors. Hence, it is a narrow moat and not wide.

Risks to Moat and Business Resilience

There are several risks that could harm Vontier’s moat and business:

Technological Disruption: Rapid changes in technology pose a considerable risk to Vontier because they may render the company’s hardware, software, and service offerings obsolete, especially in the rapidly evolving industries of vehicle electrification and digitization.
Competition: The industry in which Vontier operates is highly competitive, especially considering the presence of large and international companies. This competition may make it tough for Vontier to maintain its high returns on capital.
Economic Cycle Sensitivity: Economic cycles significantly affect the company, and their business (and customer’s revenue) is also sensitive to inflation, recession and other similar effects, causing their sales to change and fluctuate more depending on macro factors, which may impact ROIC.
Regulatory Changes: New regulations or changes in existing regulations may influence how the company can conduct its operations, especially the business in highly regulated industries, such as fuel and energy.
M&A Challenges: While acquisitions can be used to grow their business, they often prove to be costly, and could lead to low ROIC and destruction of value if not done carefully.
Dependence on Key Customers: They are dependant on some few key customers, for example, most of their revenue in the auto-parts sector comes from big vehicle manufacturers. Such high dependence could reduce their pricing power.
Supply Chain Disruptions: Supply chain disruptions could also create problems for Vontier, as delays in key components, and other important parts of their business could hinder production.

Understandability: 3 / 5

Vontier is a moderately complex company to understand. While its general business segments are relatively easy to grasp—automotive, fuel and distribution, maintenance and repair—its inter-segment operations, financial nuances and accounting practices can be more complex, requiring a thorough understanding of its financial statements and strategic operations. However, a well-informed individual can understand its business structure with some research and due diligence.

Because of their wide array of revenue sources and business segments it is not easy to understand how exactly the company makes money, therefore it receives a rating of 3.

Balance Sheet Health: 4 / 5

Vontier’s balance sheet is quite good and healthy, with more assets than liabilities. Therefore the balance sheet gets a 4/5.

The company has a solid amount of cash on hand, and manageable amounts of current and long-term debt obligations.
There’s no extreme over reliance on debt. Also they have a reasonably good current ratio of around 1.4.
They have a good credit profile and enough flexibility to take on some debt for acquisitions or investments in the future.

One area of concern is their goodwill, which is 30% of the current assets, but not unusual for a growing business that makes many acquisitions.

Latest News and Concerns:

In their last earnings call the CEO noted that the company is expecting continued growth and profitability, and he highlighted the new contract win to expand their business.
In their latest 10-Q report, they noted that their sales grew 2.4% YOY, with a slight increase in operating profit margin of 0.1%.
They noted that revenues were impacted by unfavorable currency movements, and also some by lower demand of their products in the Chinese and European markets.
Also, that their revenue was impacted by customers implementing their own supply chain logistics more effectively (which implies they will need to rely less on Vontier in the future).
There is some positive outlook for the future with increased demand from the U.S market and also an increase in their order book.

The main concern, that the company management are facing is to control the cost and expenses and maintain their margins at current rates or higher, while adapting to changing global markets with economic headwinds and lower customer demand.

Conclusion

Vontier has a business that can become a large player in the mobility sector, but it currently is too dependant on old assets and technologies. Therefore, it needs to make sure that it keeps up with current trends and competition. The balance sheet is in good shape for now, but needs to be maintained with stable profit growth, and the company has a narrow moat, that can be eroded over time.