Contrarian Value Ideas

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Trimble - >>> 2 Buys and 1 Sell From Al Gore's Investment Company


Motley Fool

By Lee Samaha

Dec 14, 2023


https://www.fool.com/investing/2023/12/14/2-buys-and-1-sell-from-al-gores-investment-company/


KEY POINTS

The manufacturing sector is adopting digital technology at a fast rate.

This company's technology is becoming an increasingly important part of its customers' workflows.

Bioprocessing, life sciences, and diagnostics are excellent long-term markets, but COVID-19 has distorted this company's near-term earnings trajectory.

An industrial software company, a positioning and workflow company, and a leading life science, bioprocessing, and diagnostics company make up a list of stocks traded by Generation Investment Management.

Al Gore co-founded Generation Investment Management in London to invest in "sustainable capitalism." You do not have to share his politics or penchant for ESG (environmental, social, and governance) investing to take an interest in what stocks the company is holding. So here's a look at three stocks that Generation traded in the third quarter.


PTC is digitalizing the industrial sector

Given that these trades were made in the third quarter, it appears that Generation was premature in closing out its position in industrial software company PTC (PTC).

While any company that sells into the industrial and manufacturing sectors will be subject to some cyclical weakness (manufacturing conditions did deteriorate in the U.S. in 2023), the reality is that PTC has some powerful secular growth drivers behind it. Industrial companies want to transform their business operations digitally by using PTC's software solutions that run from initial design through manufacturing, servicing, and disposal.

PTC's software creates a so-called digital thread of any product its software designs; the benefit of this digital thread is it creates a digital twin of a physical asset at every step of design, production, and operations can be used to iteratively improve every aspect of a product's lifecycle.

These trends proved strong enough to lead PTC to grow its annual run rate, or ARR (the annualized value of its subscriptions and contracts, representing its recurring revenue) at 13% in its fiscal 2023. And management expects ARR to grow at a double-digit rate for at least the next few years.

With ARR being the crucial determinant of free cash flow (FCF), the latter is set to expand significantly in the coming years. As such, I think Generation was wrong to close its position in PTC, and despite the 38.8% rise this year, the stock still looks like a good value.


Trimble improves efficiency and reduces waste

Generation initiated a new position in positioning and workflow technology company Trimble (TRMB 0.10%) in the third quarter by buying $349 million worth of stock at the end of the quarter.

It hasn't been a vintage year for the company. The stock is down 7.2% in 2023. The company has experienced near-term weakness in some end markets, including residential construction, agriculture, and transportation. It slightly took down its full-year revenue and earnings guidance accordingly.

That said, just as with PTC, Trimble has an excellent long-term growth opportunity from adopting game-changing digital technology. In Trimble's case, its highly precise positioning technology can not only position assets (examples include transportation fleets, construction activity, smart farming, etc.) but also create valuable real-time data that can be used to generate actionable insights.

As such, Trimble's hardware, software, and analytics solutions can significantly improve its customers' workflow productivity. And, in a nod to Generation's commitment to the environment, Trimble's technology also helps improve sustainability.

For example, resources (fertilizer, pesticides, water, etc.) can be optimized in farming, more-efficient trucking routes reduce fuel consumption, and precise management of construction projects improves efficiency and reduces waste.

Trimble continues to grow its annualized recurring revenue at a double-digit rate, and just as with PTC, the company is set to improve its FCF generation significantly in the coming years.


Adding Danaher

Generation added about 265,000 shares to its existing holding in Danaher (DHR) and now has slightly more than 3 million shares in the life science and diagnostics company.

Danaher is an attractive company, but the distortive effect of the pandemic on its revenue and earnings sometimes makes it feel like you need a Ph.D. to understand them.

For example, there's Danaher's reported sales growth and its core sales growth (excluding acquisitions/divestitures and foreign currency movements). It also reports "base business core sales growth," which used to exclude revenue related to COVID-related diagnostic testing but, as of the first quarter of 2023, also includes COVID-related vaccines and therapies life science revenue.

In addition, the recent spinoff of its environmental and applied solutions business, Veralto (VLTO), and the recent acquisition of antibodies and life-science tools company Abcam will further complicate matters. Meanwhile, Danaher's bioprocessing and life sciences customers are struggling with funding issues due to rising interest rates.

Frankly, there's a tremendous amount of noise around Danaher's near-term revenue and earnings, and there's a strong argument for avoiding the stock until the dust settles. That said, the company's biotechnology, life sciences, and diagnostics end markets are all desirable, and the company is doubling down on them by spinning off Veralto and buying Abcam.

In addition, while COVID-related revenue is in decline, the pandemic did spur renewed interest and funding for vaccines and therapies (life sciences). Danaher grew its installed base of diagnostics equipment (increasing its potential consumables revenue from selling tests).

Lastly, as CEO Rainer Blair noted on the last earnings call, "Since 2018, underlying demand for biologics has grown at an average annual rate of approximately 10% and is continuing to grow in 2023."

There's little doubt its biotechnology revenue is set for long-term growth. As such, Danaher looks like a good stock for the monitor list while awaiting more clarity on its medium-term outlook.

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