Positioning and workflow technology company Trimble (TRMB 1.68%) has a bright future, but it’s not the most well-known or well-respected company. There are a number of reasons for this, but enterprising investors willing to dig deeper into the stock could see exceptional returns. Here’s what you need to know before you buy.

Trimble is not a customer-focused company

If you work in the construction, transportation, agriculture, or mapping industries, you may have come across Trimble’s hardware and software solutions. For those unfamiliar with the company, it originally specialized in precision positioning hardware, but its future lies in expanding its software and service solutions for customers.

Rather than simply providing positioning and sensing technology, Trimble’s software and services help customers plan and model their operations (think truck fleets planning routes) and analyze and optimize their daily operations (think complex construction sites where things change every day).

This knowledge, coupled with the realization that the company’s software/recurring revenue enables higher margins and is becoming an increasingly important part of its customers’ daily workflow, makes it much easier to understand the company’s fundamental growth prospects.

Annual recurring revenue and cash flow, not sales and profit

Trimble’s annual recurring revenue (ARR) and cash flow generation are better ways to understand the company’s growth trajectory than just looking at revenue and profit. Management defines its ARR as “the estimated annual value of recurring revenue.” It includes subscriptions and maintenance in a quarter, as well as the contract value of licenses in the quarter, and then annualizes that number.

Image source: Getty Images.

In this way, it provides an excellent picture of Trimble’s business performance rather than just focusing on the revenues and profits in Trimble’s income statement.

The difference is evident in the table below with Trimble’s 2024 forecast. Mid-single-digit organic revenue growth is good enough, but note that Trimble’s ARR is growing in the low double-digit range.

Data source: Trimble presentations.

ARR is also a better indicator of what kind of free cash flow (FCF) Trimble can generate in the future. This is evident when looking at Wall Street analyst consensus for revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA). You don’t have to take these numbers at face value, but they serve to illustrate how underlying ARR growth leads to increased FCF generation over time.

The consensus is for $500 million FCF in 2024, $648 million in 2025, and $869 million in 2026. To put those numbers in context, based on the current market cap of $13.7 billion, Trimble would trade at 15.8x FCF in 2026. While that’s still a few years away, the company’s ARR growth remains strong, and the expansion of margins and cash flow from the growth of its software and recurring revenue provides increased FCF conversion.

You won’t see all of this if you focus solely on Trimble’s revenue growth.

Data source: marketscreener.com. EBITDA = earnings before interest, taxes, depreciation and amortization.

Trimble’s unresolved audit problem

Another reason why Trimble may not be a “buy” for many investors is caution around EY’s audit of its 2023 financial results. This was announced in May, and at the time Trimble’s treasurer Phil Sawarynski said, “Neither EY nor Trimble had sufficient documentation related to certain IT and other controls for revenue-related systems and processes.” CFO David Barnes noted, “This is all about the internal controls. Neither EY nor we have identified any issues with our numbers.”

CEO Rob Painter reiterated this position in August and expects the EY re-audit to be completed in about a month. While there is still some risk, there is nothing to suggest that this will have a financial impact on Trimble.

Image source: Getty Images.

A stock to buy

Trimble’s expected ARR growth of 11 to 13 percent in 2024 is even more impressive considering that one of its end markets (freight) is in recession. It shows how important its solutions are in improving its customers’ daily workflows and the long-term growth potential.

All in all, the stock is an attractive buy for investors looking to buy a share before the rest of the market jumps on the bandwagon. The company is doing very well in a difficult environment and its FCF is expected to improve significantly in the coming years, making the current valuation very attractive.