Vontier has been treading water for the past six months, recording a small loss of 2.9% while holding steady at $35.74.
Is now the time to buy Vontier, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Vontier Will Underperform?
We don't have much confidence in Vontier. Here are three reasons why we avoid VNT and a stock we'd rather own.
1. Core Business Falling Behind as Demand Plateaus
We can better understand Internet of Things companies by analyzing their organic revenue. This metric gives visibility into Vontier’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Vontier failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Vontier might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Vontier’s margin dropped by 14.8 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Vontier’s free cash flow margin for the trailing 12 months was 12.4%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Vontier’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of Vontier, we’re out. That said, the stock currently trades at 11.3× forward P/E (or $35.74 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
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