Vertiv: Bigger Margins, Higher Free Cash Flow, Raising Fair Value Estimate (NYSE:VRT)

Whereas there was some catch-up in cyclical shares within the final two months, synthetic intelligence (AI) shares have soared all through 2023. AI beneficiaries led equities via the primary three quarters of the yr, and 2024 units up properly for a lot of of those shares– some with share costs close to all-time highs.

I reiterate my maintain score on Vertiv Holdings (NYSE:VRT). I see a a lot stronger earnings and free money circulate trajectory over the approaching years, whereas a brand new inventory buyback plan places the give attention to the shareholder.

Close to-Time period AI Beneficiaries Soared From Q1 By way of Q3

In line with Financial institution of America International Analysis, VRT is {an electrical} product producer targeted on knowledge facilities (70% of income) and telecom (20%) finish markets. In 2022, Vertiv generated $5.7bn in income. Key product choices embody energy & thermal administration, IT administration, and associated providers.

The Ohio-based $18.6 billion market cap Electrical Elements and Tools {industry} firm inside the Industrial sector trades at a excessive 28 ahead 12-month non-GAAP price-to-earnings ratio and pays a low 0.05% ahead dividend yield. With earnings not due out till February, shares commerce with a still-high implied volatility share of 43% whereas quick curiosity on the inventory is modest, although materials, at 2.9% as of December 26, 2023.

Again in October, Vertiv reported a considerably weak quarter. Q3 GAAP EPS of $0.24 fell in need of the $0.32 consensus forecast whereas income of $1.74 billion, up 18% from the identical interval a yr earlier, was largely according to estimates. What I discovered encouraging, although, was that it grew its adjusted working margin to 17%, up practically 800 foundation factors from Q3 final yr – a key quantity for this data-center agency as its margins had been lagging a few of its friends whereas leverage was to the excessive facet.

Free money circulate of $221 million soared previous Wall Road’s outlook, serving to to offer some hope to the bulls after the inventory had given again some beneficial properties on earnings day. Regardless of the near-term selloff, the bulls stepped again in, maybe on the belief the VRT now has the chance to increase its manufacturing capability in mild of rising demand for AI.

Third quarter 2023 key messages

Additionally encouraging was the administration crew’s bullish earnings outlook. Vertiv now sees 2023 adjusted EPS between $1.69 and $1.73, up from the $1.54 to $1.64 vary, together with increased gross sales and adjusted working earnings. Free money circulate expectations jumped 14% from the earlier steering midpoint. Key dangers for Vertiv embody weaker demand for its knowledge facilities ought to the AI theme cool subsequent yr and weaker pricing energy from rising international competitors.

I used to be additionally a bit unimpressed with the toned-down view expressed at its November Investor Day. The administration crew had a cautious outlook on AI, but it surely nonetheless goals for 8% to 11% of annual natural income progress from 2023 to 2028, above its historic progress price. Buoying the sentiment on the occasion was the announcement of a $3 billion share buyback program and aim to decrease internet debt, which ought to cut back its leverage. Near $5 billion in free money circulate is now projected from 2024-2028 (cumulative). Amid these bullish developments, analysts at BofA named VRT as a prime choose in its {industry}

On valuation, EPS and free money circulate expectations have elevated considerably since I final reviewed the corporate in the summertime. BofA now sees working EPS approaching $3 by 2025 with per-share earnings greater than tripling this yr. The present consensus earnings outlook, per In search of Alpha, is about on par with what BofA sees – with annual progress above 20% via the out years.

Income is seen advancing by greater than 20% this yr, after which easing to a high-single-digit tempo. No dividends are anticipated to be paid on this fast-growing agency, and its trailing 12-month EV/EBITDA ratio is increased than the market’s common, however not terribly so. Lastly, GARP traders can admire how VRT’s free money circulate yield, even with a premium valuation, is seen rising above 5% over the approaching quarters.

Vertiv: Earnings, Valuation, Dividend, Free Money Move Yield Forecasts

I nonetheless have my considerations over the valuation, as VRT’s present working earnings a number of is properly above its 5-year common. If we take a distinct strategy, although, we see that the extra sanguine progress trajectory might assist such a valuation premium.

If we assume a low to mid-20% EPS progress price and apply the sector median 1.8 PEG, then the P/E could possibly be within the excessive 30s, implying a inventory value close to $80. I might mood that valuation contemplating that the 5-year common P/E is simply 21. It could be extra acceptable to use that a number of on 2024 EPS of $2.21 (consensus), suggesting a inventory value within the mid to excessive $40s, close to truthful worth right this moment.

VRT: A Premium Valuation, Interesting PEG Ratio

In comparison with its friends, VRT has a excessive valuation, however its progress historical past and outlook are downright stellar. Furthermore, profitability developments are sturdy, and GARP traders can really feel assured that proudly owning the inventory means accessing shares of a agency with rising free money circulate figures. With industry-leading share-price momentum and the inventory close to all-time highs, VRT can also be a technician’s dream. Sellside analysts additionally favor Vertiv, too – EPS revisions have been nothing however up within the final three months (10 up, zero down).

Competitor Evaluation

Wanting forward, company occasion knowledge supplied by Wall Road Horizon present an unconfirmed This fall 2023 earnings date of Wednesday, February 21 BMO. No different volatility catalysts are seen on the calendar.

Company Occasion Danger Calendar

The Technical Take

With a a lot stronger earnings and free money circulate outlook, VRT’s chart is among the many strongest you will see that in right this moment’s market. Discover within the graph under that shares are very near all-time highs. “The larger the bottom, the upper the area,” they are saying, and I see technical upside to close $50. I arrived at this determine primarily based on a key technical sample from the previous few years. VRT peaked simply shy of $29 in September 2021 earlier than plunging below $8 by mid-22. Shares then recovered all through the again half of 2022 earlier than gapping increased post-earnings again in August. That breakaway hole triggered an upside-measured transfer value goal to $50, proper the place the inventory is right this moment.

In fact, there are few technical options extra bullish than no pure sellers to provide the market above the present value. That’s the state of affairs we face right this moment with VRT. As a substitute, there’s simply modest quantity by value all the way down to about $35 with hardly any shares traded between the higher $20s and mid-$30s. With a rising 200-day transferring common, the bulls seem in management, and I like what I see within the RSI momentum gauge on the prime of the graph – VRT labored off technical overbought situations and a bearish RSI divergence. I see assist close to $43 whereas the $50 measured transfer goal stays in place on the upside with no different resistance.

Total, VRT’s chart could be very sturdy and technicals counsel shares may proceed to rise in 2024.

VRT: $50 Sample Worth Goal, No Pure Sellers Above

The Backside Line

I reiterate my maintain score on VRT. The valuation seems truthful to me given upwardly revised earnings expectations, whereas the technicals are very sturdy amid bullish momentum developments.