Vertiv (VRT) Bullish Thesis

We found a bullish thesis on Vertiv (VRT) on ValueInvestorsClub authored by leob710. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who produce quality research. We find the ideas presented on the site well thought out and deserving a serious consideration. Click here for the full article. Below we summarized the VRT bullish thesis:

The Columbus, Ohio based VRT is a full service provider of digital infrastructure solutions including design, manufacturing and servicing of the crucial technology for data centers, communication networks and commercial and industrial outfits. With an over 20,000 strong work force, VRT is a global leader with $4.4 billion in revenues in 2019 spread across power management, thermal management, IT management, IT & Edge infrastructure, and services segments. VRT is an erstwhile part of Emerson Electric.

VRT has the moat of a largely stable business as 60% of its revenues are generated from either replacing or expanding existing systems or maintenance services of its systems installed. It is mostly hard to switch these systems due to their crucial role in the mission operations. In a $30 billion TAM (Total Addressable Market) growing 3-4% yearly, VRT enjoys top position in most end-markets served. Its main competitors are Eaton, Legrand, and Schneider Electric.

Strong management team:

The former Honeywell CEO David Cote is now the Executive Chairman at VRT. His stellar track record of value creation and restructuring expertise will be a huge value addition to the company’s board. Under his leadership, Honeywell stock outperformed the S&P 500 index by 500% since 2003. Cote has invested $20 million of his own capital into VRT, which reflects his conviction of company’s growth potential. Under Honeywell, VRT was plagued with underinvestment, red tape, ineffective marketing strategies, excessive outlays, and poor management. Cote should be able to increase operating leverage from incremental revenues. The new CEO Rob Johnson (ex-Honeywell Chairman) is equally focused on growth acceleration.

Growth opportunity:

The potential growth segments of the industry include cloud/hyper-scale/colocation. After being acquired by Platinum Equity from Emerson Electric, VRT has made meaningful investments in its product lines as well as organization, which should boost its revenue growth, especially in the enterprise data centers. This product line is currently growing only at a 0.2% annually but has the potential for a 4-6% growth.

VRT is a strong FCF generator, and the analyst believes it can clock over $400 million of FCF annually. Smart capital allocation can create significant opportunities in debt reduction, acquisitions or share buybacks. VRT’s EBITA margins are currently trailing the competition by 500-700 basis points. The stock is trading at 25-40% discount to the peer group. Aided by the secular favorable trend, a 13.5x multiple over the next 4 years would create a $12.3 billion EV, and see the stock re-rated with a $35 price tag.

Foot note: VRT has risen to $21 from $16 since the article was published.