Vontier currently trades at $36.61 per share and has shown little upside over the past six months, posting a small loss of 3.4%. The stock also fell short of the S&P 500’s 8.8% gain during that period.
Is now the time to buy Vontier, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.We're cautious about Vontier. Here are three reasons why we avoid VNT and a stock we'd rather own.
Why Do We Think Vontier Will Underperform?
A spin-off of a spin-off, Vontier (NYSE:VNT) provides electronic products and systems to the transportation, automotive, and manufacturing sectors.
1. Core Business Falling Behind as Demand Plateaus
In addition to reported revenue, organic revenue is a useful data point for analyzing Internet of Things companies. 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 13.7 percentage points over the last five years. If its declines continue, it could signal higher capital intensity. Vontier’s free cash flow margin for the trailing 12 months was 11.5%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. 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 cheer for all companies making their customers lives easier, but in the case of Vontier, we’ll be cheering from the sidelines. With its shares lagging the market recently, the stock trades at 11.8× forward price-to-earnings (or $36.61 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d recommend looking at TransDigm, a dominant Aerospace business that has perfected its M&A strategy.
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