Madison Mid Cap on Vontier (VNT): “We Expect to Hold on for More”

Madison Funds, an independent investment management firm, published its fourth quarter 2020 “Madison Mid Cap Fund” investor letter – a copy of which can be downloaded here. A return of 15.54% was recorded by the fund’s Class Y shares in the fourth quarter of 2020, below its Russell Midcap benchmark that delivered a 19.91% return in the same period. You can view the complete list of the fund’s Average Annual Total Returns and its top 5 holdings to have a peek at their top bets for 2021.

Madison Mid Cap Fund, in their Q4 2020 investor letter, mentioned Vontier Corporation (NYSE: VNT) and emphasized their views on the company. Vontier Corporation is a Raleigh, North Carolina-based manufacturing company that currently has a $5.3 billion market capitalization. Since the beginning of the year, VNT delivered a -6.53.% return, pulling its 3-month gains deeper to -8.10%. As of March 26, 2021, the stock closed at $31.22 per share.

Here is what Madison Mid Cap Fund has to say about Vontier Corporation in their Q4 2020 investor letter:

“Vontier is a recent spin-off from Fortive Corporation, which itself is a four-year old spin-off from corporate blue chip Danaher Corporation. The company is an industrial conglomerate with several segments, the two largest of which are a unit that sells pump equipment and software to gas stations, and a business that makes and sells tools to auto mechanics. There was quite a bit of selling pressure on its newly listed shares when it was spun out in October, as the company is one-quarter the size of Fortive, and consisted of slower growing businesses that, in essence, Fortive management didn’t want. It turns out, neither did many Fortive shareholders.

That was our opportunity. We pounced immediately, scooping up shares of Vontier for roughly 11x free cash flow. This is an extraordinarily low multiple for a well-run company with moderate debt, low cyclicality, and 20%+ returns on invested capital. The missing ingredient is a clear outlook for growth; if anything the company will see a mild revenue decline in 2021 and perhaps 2022, as it recovers from the hangover of a revenue boost it received in 2019 and 2020 from a regulatory deadline that forced its customers to buy upgraded products. It wouldn’t bother us if revenue declined for a two-year stretch; we invested at a price that can withstand that sort of temporary idleness. But due to its strong cash flow, the company will have many levers to pull for value creation. The ace in the hole here is that the executive team is deeply inculcated in the management toolkit known as the Danaher Business System. This so-called system was famously created and applied at Vontier’s forebears to great corporate success. Margins grew, working capital efficiency improved, and perhaps most importantly, acquisitions were effectively executed and integrated. We believe that as a newly independent company, those tools will be put to use to an extent that was not available before. The shares are already up a fair amount since our purchase, and the initial recovery from indiscriminate selling has probably been captured. We expect to hold on for more.”

Our calculations show that Vontier Corporation (NYSE: VNT) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Vontier Corporation was in 36 hedge fund portfolios. VNT delivered a -0.57% return in the past month.