Vertiv (NYSE:VRT) Surprises With Q4 Sales

Data center products and services company Vertiv (NYSE:VRT) reported Q4 CY2024 results exceeding the market’s revenue expectations, with sales up 25.8% year on year to $2.35 billion. The company expects next quarter’s revenue to be around $1.93 billion, close to analysts’ estimates. Its non-GAAP profit of $0.99 per share was 20.6% above analysts’ consensus estimates.

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“Data centers are crucial for meeting the world’s digital demands,” said Giordano Albertazzi, Vertiv’s Chief Executive Officer.

Company Overview

Formerly part of Emerson Electric, Vertiv (NYSE:VRT) manufactures and services infrastructure technology products for data centers and communication networks.

Electrical Systems

Like many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.

Sales Growth

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Vertiv’s 12.6% annualized revenue growth over the last five years was excellent. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Vertiv’s annualized revenue growth of 18.6% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Vertiv’s organic revenue averaged 19.7% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Vertiv reported robust year-on-year revenue growth of 25.8%, and its $2.35 billion of revenue topped Wall Street estimates by 8.8%. Company management is currently guiding for a 17.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13.9% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is noteworthy and indicates the market is factoring in success for its products and services.

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Operating Margin

Vertiv has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.8%, higher than the broader industrials sector.

Looking at the trend in its profitability, Vertiv’s operating margin rose by 12.2 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Vertiv generated an operating profit margin of 19.5%, up 4.2 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Vertiv’s EPS grew at an astounding 44.7% compounded annual growth rate over the last five years, higher than its 12.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Vertiv’s earnings to better understand the drivers of its performance. As we mentioned earlier, Vertiv’s operating margin expanded by 12.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Vertiv, its two-year annual EPS growth of 131% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q4, Vertiv reported EPS at $0.99, up from $0.56 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Vertiv’s full-year EPS of $2.85 to grow 25.2%.

Key Takeaways from Vertiv’s Q4 Results

We were impressed by how significantly Vertiv blew past analysts’ organic revenue expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. On the other hand, its EPS guidance for next quarter missed and its full-year EPS guidance also fell slightly short of Wall Street’s estimates. Overall, we think this was still a solid quarter with some key areas of upside. The stock remained flat at $124.01 immediately after reporting.

Vertiv put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.