Connect & Scale Strategy Aims To Improve Future Profitability, But Freight And Construction Challenges May Hinder Progress

Key Takeaways

• Focus on software and services boosts stability and revenue growth, with a significant portion of revenue from recurring sources.
  
• Transformation strategy targets large markets for growth, leveraging AI for innovation and increased shareholder returns.
  
• Delays in 10-K filing, freight market challenges, currency headwinds, tariffs, and a slow construction market could jeopardize Trimble's financial performance and revenue growth.

Catalysts

Provides technology solutions that enable professionals and field mobile workers to enhance or transform their work processes worldwide.

• Trimble's ARR (Annual Recurring Revenue) has shown significant growth, increasing from $1.2 billion in 2019 to $2.26 billion in 2024, with a target of $3 billion by 2027. The focus on recurring revenue from software and services, now 76% of total revenue, is likely to drive stability and long-term revenue growth.
  
• The Connect & Scale strategy is aimed at transforming Trimble's technology to digitize and improve workflow in large, underserved markets including construction and transportation, with a total addressable market of over $70 billion. This strategy is expected to enhance Trimble’s future revenue growth and market penetration.
  
• Gross margins have improved over 1,000 basis points to 68.2% in 2024 due to a shift toward higher margin software and services, an indicator of improved net margins and profitability potential.
  
• Trimble plans to leverage AI and data-centric approaches to enhance product innovation and operational efficiencies, potentially leading to higher profit margins and earnings growth by improving productivity and amplifying customer value.
  
• The company has increased its share repurchase authorization to $1 billion, highlighting its focus on capital allocation to enhance shareholder returns and potentially boost EPS (Earnings Per Share) significantly in the future.

Trimble Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Trimble's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 40.8% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $71.3 million (and earnings per share of $0.29) by about March 2028, down from $1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 381.5x on those 2028 earnings, up from 11.5x today. This future PE is greater than the current PE for the US Electronic industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.61%, as per the Simply Wall St company report.

Trimble Future Earnings Per Share Growth

Risks

• Trimble's performance could be negatively impacted by delays in its 10-K filing, which may raise investor concerns about financial transparency and could affect earnings if compliance issues arise.
  
• The transportation segment is facing a challenging freight market environment, which could impact revenue growth if conditions do not improve.
  
• Foreign currency translation headwinds, particularly from the euro-denominated Transporeon business, could negatively affect Trimble's earnings if currency fluctuations continue to go against them.
  
• The potential impact of new tariffs could bring financial risks, particularly in the AECO segments, affecting revenue if cost structures change unfavorably.
  
• In the current macro environment, with fewer new construction projects and customers working down backlogs, Trimble's revenue growth might be at risk if market conditions do not favor new investments.

Valuation

• The analysts have a consensus price target of $87.272 for Trimble based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $95.0, and the most bearish reporting a price target of just $78.32.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $71.3 million, and it would be trading on a PE ratio of 381.5x, assuming you use a discount rate of 7.6%.
• Given the current share price of $70.19, the analyst price target of $87.27 is 19.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.