Trimble (TRMB) Slips as Morgan Stanley Downgrades to Underweight

September 23, 2021 8:40 AM EDT
Get Alerts TRMB Hot Sheet
Price: $84.93 +1.57%

Rating Summary:
    13 Buy, 7 Hold, 1 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 13 | Down: 13 | New: 72
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Morgan Stanley analyst Meta A Marshall downgraded shares of Trimble (NASDAQ: TRMB) to Underweight from Equal-weight with a price target going to $74.00 per share from the prior $80.00.

The analyst argues that the cyclical backdrop has driven valuation off course. As a result, Marshall says that a greater level of earnings upside is warranted to justify the multiple expansion YTD.

“We see the primary catalyst to driving downside in the name being smaller beats that will not generate enough earnings growth to support a historically high multiple (now trading at ~30xFY22 P/E vs. ~20x average multiple over the past 10 years). An undeniably positive cyclical backdrop is the primary risk to our more cautious view with Ag spend and construction activity likely to remain strong. However, other cyclically exposed names have already seen multiple contraction on back of earnings upside and peaking grain prices. TRMB now trades above large-cap software on a FCF growth adjusted basis, which we think means even software re-rating is unlikely to insulate the name from multiple contraction,” Marshall said in a client note.

As a result, the analyst sees risk-reward skewed to the downside, hence the downgrade to UW. For what needs to change that will make the analyst turn more positive, Marshall outlines the potential incremental strategic activity that further accelerates software transition.

Although the analyst takes note of strong demand, he outlines tough comps for FY22 as a key factor that is likely to limit the upside.

“Construction activity remained stronger than expected throughout the past year and has picked up with broader re-openings and rising grain prices have increased farmer activity and willingness to spend. While each is a positive demand indicator for TRMB, we think growth rates are likely to slow as the company will now be lapping more difficult compares, particularly given evolving supply chain challenges,” Marshall added.

“We expect increased technology prioritization and structurally higher budgets for technology to support a higher multiple than TRMB had achieved historically, but multiple contraction as tailwinds subside (e.g. commodity prices, anticipation of infrastructure bill),” the analyst concluded.

Shears of Trimble are down about 2% in pre-open Thursday.

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