Trimble Seen As On-Course Despite Head Winds

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Trimble Navigation ( TRMB ) may well face head winds in its key agriculture business this year as low commodity prices threaten to eat into farmers' spending power.

That shouldn't stop the maker of Global Positioning System gear and other location technologies from reaping the benefits of a strong market position and generating solid gains in its engineering and construction business, analysts say.

Trimble has evolved from offering simple GPS-based positioning devices to providing advanced software and data subscription products to improve equipment accuracy and efficiency in farming, construction and other industries.


Its lineup includes products that automate large industrial machines such as tractors and bulldozers, surveying instruments, integrated systems that track fleets of vehicles and workers while providing real-time analytics to the back office, and software solutions that connect all aspects of a construction site or farm.

The agriculture part of the business generates about 25% of Trimble's revenue and 30% of its overall profit, says Ryan Connors, an analyst at Janney Montgomery Scott.

Down On The Farm

Here's where the head wind comes in: Farmers' income levels are a function of commodity prices, and after hitting record levels in 2012 and 2013, prices of commodities such as corn have "declined pretty substantially," Connors says.

"As lower commodity prices impact farmers' income levels this will create a head wind for their business this year," he said.

Still, Connors expects Trimble's agriculture business to continue to grow, though likely a "little more slowly" than last year.

"I think sales will hold up relatively well," he added. "Farmers are still in an adoption cycle of technology. Even in a down market for agriculture as a whole, farmers continue to accelerate the implementation of technology. That remains a powerful growth driver for Trimble."

Trimble has capitalized on a trend called precision farming, which is the use of GPS-enabled devices and software to improve farm efficiency and productivity.

Through its offerings in this area, the company helps farmers with every step of the farming process, including land preparation, then the planting, nutrient and pest management, and harvesting phases of a crop cycle. Trimble provides manual and automated navigation guidance for tractors and other farm equipment used in spraying, planting, cultivation and harvesting.

The company offers operations management tools with its Connected Farm platform, which allows information exchange across an entire farm.

Trimble's ability to integrate GPS or other location technologies with application software that boosts productivity has helped the company's advantage, analysts say.

That advantage is reflected in its track record: Trimble has posted double-digit profit gains in all but two of the past 15 quarters. It is expected to keep up that growth level. Analysts surveyed by Thomson Reuters expect first-quarter earnings, to be reported on May 6, to rise 11% to 42 cents a share.

That would follow a solid showing in the fourth quarter. Trimble reported EPS minus items of 43 cents, up 48% from a year earlier and 6 cents above analyst forecasts. Revenue rose 16% to $599.2 million, ahead of views for $567.4 million.

Connors estimates that first-quarter earnings will come in at 43 cents a share, ahead of the consensus of 42 cents a share.

"I think the tone and guidance for the remainder of the year will be very positive as well," he said.

Connors is upbeat about Trimble's prospects for the construction side of its business, which he says represents about 50% of overall profit and similar in sales.

"Construction is starting to move into an up cycle, particularly nonresidential, which is getting set to hit its stride," he said. "So where it has a head wind in agriculture, I believe it has a very nice tailwind in construction, which is coming off a bottom of a cycle."

And, he adds, "just like in agriculture, there's also an adoption of technology taking place" on the part of construction companies.

At Trimble, the engineering and construction segment's software and technology capabilities include advanced civil engineering alignment, design and data preparation software for advanced surveying, geospatial data collection and analysis, and an application-specific field and office software component.

One example is the Connected Site, which comprises offerings that integrate the construction process, including the ability to track equipment and perform remote machine diagnostics.

Needham & Co. analyst Richard Valera says first-quarter results "should be at least solid relative to their guidance and consensus.

"We think the strong recent performance of the stock probably anticipates pretty decent results and guidance," he said.

Agriculture Outlook

Still, Valera was "concerned about the macro agricultural cycle" heading into 2014, given the fact that commodity prices "appear to have peaked in 2012 and 2013."

And 2014 is expected to be a "down year" for the agriculture equipment market made by companies such asDeere & Co. ( DE ), he says.

While Trimble's sales aren't directly correlated with farm equipment sales, there's "some correlation," he adds.

"For the first half of the year, Trimble is set up pretty well," he said. "The thing they have going for them is their comparisons will be easy with last year."

But the second half of the year is a different story: "For the second half of the year, the market for agriculture equipment in unit sales is expected to see a pretty solid decline, and Trimble's comparisons will be significantly tougher."

Trimble is the third-largest firm by market capitalization in IBD's Electronic-Miscellaneous Products industry group, afterCorning ( GLW ) andKyocera ( KYO ).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: TRMB , DE , GLW , KYO

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