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2025 period. This comes on top of a >100% increase in capacity over 2021-2023. And they recently opened a new manufacturing facility in India for thermal management products for domestic and international markets. This follows the opening of a thermal manufacturing…
m. At ~2x net leverage and a cash generative business model, they are positioned to make this happen.
We also cant overlook the fact that Vertiv has partnerships with Nvidia, Intel $INTC (bought Habana AI in 2019) and others. Jensen (Nvidia CEO) called out Vertiv as the world leader, saying their collaboration is growing in leaps and bounds and that their partnership is more important than ever.
Numbers / estimates higher at a reasonable valuation = stock higher. Simple model summary and valuation snapshot below. These are base case estimates and I don’t expect them to guide to what I am expecting right away on the Q4 call. I also reserve the right to revise my estimates as the data suggests - likely higher.
Starting with Q4 – management said to expect a similar growth rate in Q4 as in Q3. We saw 18% growth in Q3 and the street is at ~14% growth for Q4. Either people aren’t paying attention, or they don’t trust management. I trust that this management team will continue to be conservative with the hopes of creating a consistent beat / raise story.
At the investor day in November 2023, management gave “very preliminary” 2024 guidance of 8-11% sales growth and operating margins 16.5-16.9%, with 83-87% FCF conversion. Given the “very preliminary” comment its clear that this is more a floor than a ceiling. The street is at ~10% growth for 2024 and has it slowing to HSD in 2025 and 2026.
Important to note that Vertiv’s growth has largely been US driven (grew >40% in 2023). And while this is where most of the AI investment is taking place, international markets will eventually pick up – this is another advantage of Vertiv’s global footprint. Vertiv grew >20% in 2023, despite APAC down ~5% (macro weakness in China) and EMEA only up high single digits.
Additionally, management has said incremental margins (margins on incremental revenue that flows through) are currently ~30%, but will move toward ~35% as the liquid cooling investments start to bear fruit. As you can see in my model summary, I can get to >20% operating margins in 2026 (managements long term guidance is 20%+ operating margins sometime in 2026-2028 period).
Backlog is also at record levels ~$5bn, which tells you >3/4 of the year is already accounted for. And again, I expect orders to grow faster than sales through 2024, leading to another record backlog number on the horizon. Importantly, management spoke to taking ~5% pricing in their backlog, which tells me pricing could be up mid single digits again this year. Historically this has been a flat to down ~1% annually pricing business, but the demand environment has changed this and I expect it to last for several years before mean reverting. Management has said they expect to be price / cost positive on a go forward basis.
Balance sheet is healthy, which will allow them to paydown debt, buyback stock and make bolt on technology acquisitions. Current debt structure is $850mm fixed rate bond 4.125% due October 2028 and a $2.1bn term loan due March 2027. The term loan is split between $1.1bn at variable rate currently ~8% (focus is to pay this down over next two years, which should allow them to accelerate capital deployment) and $1bn fixed ~4%. Vertiv also has authorization to buyback $3bn worth of stock over the next 4 years (~15% of market cap).
The stock currently trades ~20x EV / operating profit (I’m using this metric because this is what they guide to). I’m assuming this multiple holds, which it will as long as numbers / estimates go higher. There is no pure play comp, but Eaton trades ~23x and Amphenol trades ~22x (also a low double-digit growth with >30% incremental margins). As I look out a few years, I can still get to meaningful upside, despite the recent run in the stock (see below).
The key risk is that AI investment / capex slows. Additionally, Vertiv could lose market share if they don’t continue to innovate / buy the innovators. They could also make execution errors, which they did early in Covid under a different management t[...]
We also cant overlook the fact that Vertiv has partnerships with Nvidia, Intel $INTC (bought Habana AI in 2019) and others. Jensen (Nvidia CEO) called out Vertiv as the world leader, saying their collaboration is growing in leaps and bounds and that their partnership is more important than ever.
Numbers / estimates higher at a reasonable valuation = stock higher. Simple model summary and valuation snapshot below. These are base case estimates and I don’t expect them to guide to what I am expecting right away on the Q4 call. I also reserve the right to revise my estimates as the data suggests - likely higher.
Starting with Q4 – management said to expect a similar growth rate in Q4 as in Q3. We saw 18% growth in Q3 and the street is at ~14% growth for Q4. Either people aren’t paying attention, or they don’t trust management. I trust that this management team will continue to be conservative with the hopes of creating a consistent beat / raise story.
At the investor day in November 2023, management gave “very preliminary” 2024 guidance of 8-11% sales growth and operating margins 16.5-16.9%, with 83-87% FCF conversion. Given the “very preliminary” comment its clear that this is more a floor than a ceiling. The street is at ~10% growth for 2024 and has it slowing to HSD in 2025 and 2026.
Important to note that Vertiv’s growth has largely been US driven (grew >40% in 2023). And while this is where most of the AI investment is taking place, international markets will eventually pick up – this is another advantage of Vertiv’s global footprint. Vertiv grew >20% in 2023, despite APAC down ~5% (macro weakness in China) and EMEA only up high single digits.
Additionally, management has said incremental margins (margins on incremental revenue that flows through) are currently ~30%, but will move toward ~35% as the liquid cooling investments start to bear fruit. As you can see in my model summary, I can get to >20% operating margins in 2026 (managements long term guidance is 20%+ operating margins sometime in 2026-2028 period).
Backlog is also at record levels ~$5bn, which tells you >3/4 of the year is already accounted for. And again, I expect orders to grow faster than sales through 2024, leading to another record backlog number on the horizon. Importantly, management spoke to taking ~5% pricing in their backlog, which tells me pricing could be up mid single digits again this year. Historically this has been a flat to down ~1% annually pricing business, but the demand environment has changed this and I expect it to last for several years before mean reverting. Management has said they expect to be price / cost positive on a go forward basis.
Balance sheet is healthy, which will allow them to paydown debt, buyback stock and make bolt on technology acquisitions. Current debt structure is $850mm fixed rate bond 4.125% due October 2028 and a $2.1bn term loan due March 2027. The term loan is split between $1.1bn at variable rate currently ~8% (focus is to pay this down over next two years, which should allow them to accelerate capital deployment) and $1bn fixed ~4%. Vertiv also has authorization to buyback $3bn worth of stock over the next 4 years (~15% of market cap).
The stock currently trades ~20x EV / operating profit (I’m using this metric because this is what they guide to). I’m assuming this multiple holds, which it will as long as numbers / estimates go higher. There is no pure play comp, but Eaton trades ~23x and Amphenol trades ~22x (also a low double-digit growth with >30% incremental margins). As I look out a few years, I can still get to meaningful upside, despite the recent run in the stock (see below).
The key risk is that AI investment / capex slows. Additionally, Vertiv could lose market share if they don’t continue to innovate / buy the innovators. They could also make execution errors, which they did early in Covid under a different management t[...]
Offshore
m. At ~2x net leverage and a cash generative business model, they are positioned to make this happen. We also cant overlook the fact that Vertiv has partnerships with Nvidia, Intel $INTC (bought Habana AI in 2019) and others. Jensen (Nvidia CEO) called out…
eam.
Vertiv also serves certain telecom end markets, which have slowed post heavy 5G investments. However, this is a small part of the overall business (and getting smaller given data center growth). - Radnor Capital tweet
Vertiv also serves certain telecom end markets, which have slowed post heavy 5G investments. However, this is a small part of the overall business (and getting smaller given data center growth). - Radnor Capital tweet
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Stock Analysis Compilation
Royce IP on Transcat $TRNS US
Thesis: Transcat's focus on scalable services, automation, and strategic acquisitions positions it for significant market share growth in high-value sectors
(Extract from their article) https://t.co/7T2b1GzT4y
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Royce IP on Transcat $TRNS US
Thesis: Transcat's focus on scalable services, automation, and strategic acquisitions positions it for significant market share growth in high-value sectors
(Extract from their article) https://t.co/7T2b1GzT4y
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Offshore
Video
Startup Archive
Peter Thiel on what he would look for if he was joining a startup
Wharton professor Adam Grant asks Peter Thiel what he would look for if he was joining an early-stage startup. Thiel gives a simple response:
“Do you like the people? Do you think you could become good friends with these people? That’s such a critical part for getting these things to work.”
He recalls interviewing with a law firm in New York early in his career and one partner telling him:
“It’s a place where everybody hates everybody else, but we all make lots of money.”
The partner viewed it as an illustration of how incredibly “professional” the firm was. But Thiel argues that we need more than just “professional” at work.
Thiel elaborates more on this idea in his book Zero to One:
“Why work with a group of people who don’t even like each other? Many seem to think it’s a sacrifice necessary for making money. But taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s not even rational. Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together. If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms.”
Video source: @Wharton (2014)
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Peter Thiel on what he would look for if he was joining a startup
Wharton professor Adam Grant asks Peter Thiel what he would look for if he was joining an early-stage startup. Thiel gives a simple response:
“Do you like the people? Do you think you could become good friends with these people? That’s such a critical part for getting these things to work.”
He recalls interviewing with a law firm in New York early in his career and one partner telling him:
“It’s a place where everybody hates everybody else, but we all make lots of money.”
The partner viewed it as an illustration of how incredibly “professional” the firm was. But Thiel argues that we need more than just “professional” at work.
Thiel elaborates more on this idea in his book Zero to One:
“Why work with a group of people who don’t even like each other? Many seem to think it’s a sacrifice necessary for making money. But taking a merely professional view of the workplace, in which free agents check in and out on a transactional basis, is worse than cold: it’s not even rational. Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together. If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms.”
Video source: @Wharton (2014)
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Video
Startup Archive
RT @ancerj: Look at Europe. The default of civilization is decadently demanding resources be spent *now* on pet projects, retirement, "quality of life;" not on a better future that verbalists will call unreasonable, unsustainable, unequal.
It takes bold live players to halt that dynamic.
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RT @ancerj: Look at Europe. The default of civilization is decadently demanding resources be spent *now* on pet projects, retirement, "quality of life;" not on a better future that verbalists will call unreasonable, unsustainable, unequal.
It takes bold live players to halt that dynamic.
Elon Musk: “Technology does not automatically improve”
“People are mistaken when they think that technology just automatically improves. It does not automatically improve. It only improves if a lot of people work very hard to make it better. And actually it will I think—by itself—degrade.”
Elon continues:
“If you look at the progress in space, in 1969 we were able to send somebody to the moon. Then we had the Space Shuttle. The Space Shuttle could only take people to low-earth orbit. Then the Space Shuttle retired and the United States could take no one to orbit.”
This is why he believe SpacEx’s mission of making humans a space-faring civilization is so important. It’s not inevitable, and it will require a lot of talented people working really hard to make it happen.
“You look at great civilizations like ancient Egypt, and they were able to make the pyramids, and they forgot how to do that. And the Romans, they built these incredible aqueducts. They forgot how to do it.”
Video source: @TEDTalks (2017) tweet
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Quiver Quantitative
BREAKING: Senator Shelley Moore Capito just disclosed a purchase of stock in GE Aerospace, $GE.
GE Aerospace makes jet engines for military aircraft.
Capito sits on the Senate Appropriations Subcommittee on Defense, which oversees defense spending. https://t.co/CamVzQV09F
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BREAKING: Senator Shelley Moore Capito just disclosed a purchase of stock in GE Aerospace, $GE.
GE Aerospace makes jet engines for military aircraft.
Capito sits on the Senate Appropriations Subcommittee on Defense, which oversees defense spending. https://t.co/CamVzQV09F
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Investing visuals
Geopolitical tension is one of the main risks that $ASML is facing. Here's a breakdown of its revenue by geography 👇 https://t.co/mCJVzJwEoy
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Geopolitical tension is one of the main risks that $ASML is facing. Here's a breakdown of its revenue by geography 👇 https://t.co/mCJVzJwEoy
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Offshore
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Stock Analysis Compilation
THB AM on Hawkins $HWKN US
Thesis: Hawkins leverages strategic acquisitions and cost synergies to dominate niche markets and drive robust cash flow growth
(Extract from their Q3 letter) https://t.co/ijuXHQwOsy
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THB AM on Hawkins $HWKN US
Thesis: Hawkins leverages strategic acquisitions and cost synergies to dominate niche markets and drive robust cash flow growth
(Extract from their Q3 letter) https://t.co/ijuXHQwOsy
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Quiver Quantitative
RT @QuiverCongress: JUST IN: Representative @VernBuchanan has introduced legislation to make daylight savings time permanent.
Follow here for updates. https://t.co/YuYewvKbQt
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RT @QuiverCongress: JUST IN: Representative @VernBuchanan has introduced legislation to make daylight savings time permanent.
Follow here for updates. https://t.co/YuYewvKbQt
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