1 Top Growth Stock to Buy Without Hesitation

Buying growth stocks usually implies believing in the company's long-term earnings potential. That belief should remain even when the company's end markets are going through some temporary weakness. That is the argument behind buying stock in positioning and modeling technology company Trimble (TRMB 1.59%). The company has seen some weakness in its end markets but still has excellent long-term growth potential and trades at a favorable valuation. 

Strong long-term growth prospects

The industrial technology company has bright long-term growth prospects. It operates across four main end markets: infrastructure/construction, transportation, agriculture, and geospatial. Its hardware and software technology was originally used purely for positioning and sensing (for example, geospatial mapping) but over the years it has evolved into planning and modeling (an example includes tracking and planning trucking fleet movements). Now, it's moving toward analytics and optimization, using data to improve daily customer outcomes, such as with precision agriculture and construction management.

Image source: Getty Images.

Two things the market is worried about

Unfortunately, the stock is slightly down this year compared to a 12.3% rise in the S&P 500 at the time of writing. The decline reflects a couple of concerns the market might have about the company. The first is the 15% year-over-year organic decline in product sales in the first quarter, and the second is the deteriorating trade conditions at Transporeon, a transportation platform management company Trimble recently acquired.

Management lowered its expectations for revenue from Transporeon in 2023 by 10% on the last earnings call citing slowing demand in Europe. The decline in product revenue comes as dealers reduced their inventory, having rushed to order last year as Trimble's supply chain issues started to ease and it was able to deliver product.

Trimble's doing better than the market thinks

That said, some more context on the results helps underline what a good value the stock is. The table below shows that Trimble's subscription and services revenue, which includes its software as a service (SaaS) and licenses, grew 14%. Trimble's software revenue comes with a higher profit margin and contributes to growth in its annualized recurring revenue (ARR). This is the critical metric management guides to. It refers to its contract value of licenses in the quarter added to its recurring revenue and then extrapolated over the full year. 

ARR is also the critical metric driving free cash flow (FCF) generation. 

Data source: Trimble presentations.

For the full year, management expects ARR to grow by a mid-teens rate and its FCF to equate to net income. Given that the midpoint of its full-year EPS guidance is $2.62, it implies FCF will be a similar amount (EPS is calculated from net income) and would put Trimble on a full-year price-to-FCF multiple of less than 20 times.

Is Trimble stock a buy?

Perhaps this question should be reworded: Is Trimble stock a buy, given the potential for near-term disappointment? There's no doubt that the potential is there. It's never good when an acquisition starts with management lowering the expectations on which it based its acquisition valuation. Unfortunately, the European economy continues to look weak due to geopolitical stresses created by conflict in the region. 

Moreover, customer destocking can extend longer than management often thinks it will, not least if dealers feel pessimistic about the economic environment. Indeed, it's worth noting that the Wall Street analyst consensus is for full-year EPS of $2.61, a figure slightly below the midpoint of management's guidance for $2.52 to $2.72. 

That said, Trimble continues to meet its ARR expectations, and doing so should lead to significant growth in FCF generation in the coming years. Meanwhile, declining to buy a great growth stock on an excellent valuation just because you are worried about trading over a quarter or two rarely makes sense. On balance, the stock remains attractive for long-term investors who can tolerate some volatility along the way.