It would be an understatement to say digital infrastructure technology company Vertiv (VRT 6.83%) has had a challenging 2022. As I write, the stock is down over 24% over the past year. Most of that decline came in the month following a tumultuous fourth-quarter 2021 earnings report released in February 2022. However, since hitting a 52-week low in July 2022, the stock has roughly doubled in value as investors warmed to the returned potential for growth at the company under new management.
Is Vertiv stock a buy right now? Let's take a closer look.
Vertiv's fall and rise
Vertiv offers a wide range of products to data centers and communication network customers, including power management, thermal management, and management systems. It's an exciting market, and there's no problem with the company's orders and backlog. For example, orders were up 15% year over year in the third quarter of 2022, and the backlog stood at $4.7 billion at the end of the third quarter, a 46% increase from the end of 2021. For reference, management expects about $5.7 billion in sales for 2022.
The problem, and the main reason for the vast earnings miss and disappointing guidance last February, comes down to cost inflation, supply chain pressures on cost, and the company's ability to deliver products. On the earnings call last February, Executive Chairman Dave Cote declared himself "disappointed and embarrassed" by the company's second half of 2021 performance, noting that "we got behind on the inflation recovery curve with insufficient price and stayed there all year." More on Cote in a moment.
Unfortunately, some of those supply chain issues persisted through 2022 and are expected to be ongoing until "at least mid-2023," according to former CEO Rob Johnson in October. Still, if 2021 was about being behind the inflationary curve, 2022 was a year of increasing pricing to offset cost increases. Indeed, in a sign that Vertiv was overcoming its issues, the difference between price and cost increases was a positive $35 million in the third quarter of 2022.
High-profile backing
As such, the investment case for Vertiv rests on the company improving its execution under new CEO Giordano Albertazzi. The new CEO has been groomed for the role after a successful stint raising profit margin as head of Vertiv's Europe, Middle East, and Africa region in three years to 2021, and then as president of its Americas region.
The excellent news is Albertazzi has some high-profile backers. Not only has activist investor Starboard Value taken a near 4.5% stake in Vertiv, but the aforementioned Cote is somewhat of a management legend in the industrial sector. A former protege of Jack Welch at General Electric, Cote is possibly the best CEO GE never had and probably the best CEO Honeywell did have. His 2002-2017 tenure at Honeywell came when the stock generated a total return of 414% for investors compared to 68% for GE and a 144% increase in the S&P 500. In that time, he transformed Honeywell from an ailing company to one with plenty of growth potential.
Cote's active involvement gives a lot of confidence to the investment case for Vertiv, and it's part of the reason for Starboard's investment. The activist investor's argument for buying the stock is a typical value investor's case. Starboard sees an opportunity for Vertiv's earnings margin and valuation to catch up with the electrical products businesses of its industry peers.
Image source: Getty Images.
Vertiv in 2023
One way to judge Vertiv's progress in delivering on its backlog and overcoming supply chain issues will be its performance in the fourth quarter of 2022 and guidance for 2023. The company will report its earnings on Wednesday, Feb. 22, with current guidance calling for a full-year 2022 adjusted operating profit of $450 million to $470 million in 2022, and an adjusted operating profit of $730 million to $750 million in 2023. These midpoints imply a 60% increase in adjusted operating profit from 2022 to 2023 -- something to look out for.
A stock to buy?
The data center market is a hot sector to be in -- Vertiv's peer Eaton recently cited data center as a particularly strong part of its 34% orders growth in the last 12 months -- and Vertiv's opportunity is to execute against its backlog as supply chain pressures ease through 2023. If Starboard is right, Vertiv could generate significant margin expansion in the coming years, generating substantial returns for investors. However, cautious investors may want to wait for the next set of results. Otherwise, the stock looks very attractive.
