We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Is VRT Stock's Premium Valuation Justified by its Dividend Potential?
Read MoreHide Full Article
Vertiv (VRT - Free Report) announced a cash dividend of 2.5 cents per share for shareholders (as of Sept. 17), payable on Sept. 26. Its current dividend yield of 0.13%, and its payout ratio is 5%, which we believe is sustainable given VRT’s improved liquidity position.
As of June 30, 2024, Vertiv’s cash balance totaled $579.7 million. Cash flow from operating activities was $378.4 million and free cash flow was $333.4 million for the second quarter. Overall liquidity strengthened to $1.2 billion.
VRT Shares Trade at a Premium
Vertiv’s sustainable dividend-paying capability is attractive to investors. However, we point out that VRT stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.
In terms of the trailing 12-month Price/Book ratio, VRT is trading at 18.32X, higher than its median of 13.32X and the broader Zacks Computer & Technology sector’s 9.35X.
Price/Book Ratio (TTM)
Image Source: Zacks Investment Research
Hence, the question that should arise in investors’ minds is – Is Vertiv’s growth prospect enough to support and eventually increase this dividend payout, and does it justify current premium valuation?
Let’s dig deep to find out.
VRT Shares Ride on Strong Order Growth
VRT shares have surged 62.4% year to date (YTD), outperforming the broader sector’s return of 16.5% and the Zacks IT Services industry’s appreciation of 4.6%.
It has been benefiting from strong order growth and backlog. Vertiv hit a backlog of $7 billion, which increased 47% year over year and 11% sequentially in the second quarter of 2024. Organic orders surged 57% year over year, and the book-to-bill ratio was 1.4 times.
This has helped VRT outperform its industry peers over the same timeframe, including ServiceNow (NOW - Free Report) and Infosys (INFY - Free Report) . INFY and NOW shares have gained 27.6% and 18.1%, respectively.
Vertiv now expects third-quarter 2024 order growth at low double-digits (10%-15% range) despite tough comparisons. On a trailing 12-month basis, the order growth rate is expected between 30% and 35%. Solid AI-related demand is expected to provide a tailwind to 2025 order and sales growth.
YTD Performance
Image Source: Zacks Investment Research
Improved Liquidity Aids VRT’s Prospects
Vertiv’s focus on reducing debt is commendable. Net leverage was 1.8 times at the end of the second quarter, which was within VRT’s stated leverage target range of 1 time to 2 times.
It repriced the existing seven-year term loan worth $2.1 billion that reduced interest expense by 61 basis points and resulted in interest savings of roughly $13 million per year.
Vertiv now expects 2024 free cash flow between $850 million and $900 million for 2024, reflecting improvement in profits.
VRT expects operating income between $375 million and $395 million, with a mid-point of $385 million for the third quarter of 2024. Adjusted operating margin is expected in the 19.4-19.8% range, with a mid-point of 19.6%.
Vertiv's Expanding Capacity to Support Clientele Growth
Vertiv is expanding capacity across liquid cooling, thermal, UPS, switchgear, busbar and modular solutions to accommodate AI-driven demand growth.
Next-generation chips that form the backbone for rapid adoption of AI liquid cooling are a must. It recently launched the MegaMod CoolChip, a liquid cooling-equipped prefabricated modular data center solution that is engineered to enable efficient and reliable AI computing.
An expanding partner base that includes the likes of Ballard Power Systems (BLDP - Free Report) and ZincFive is expected to drive top-line growth.
Ballard Power and Vertiv are collaborating on developing backup power applications for data centers and critical infrastructures, scalable from 200kW to multiple MWs. Vertiv has added the ZincFive BC Series UPS battery cabinets to its portfolio of battery systems available for data center backup power.
VRT’s FY24 Earnings Estimates Trending Upward
For 2024, Vertiv expects revenues between $7.59 billion and $7.74 billion, indicating an organic growth rate of 12-14% year over year. Non-GAAP earnings are expected between $2.47 per share and $2.53 per share.
The Zacks Consensus Estimate for 2024 revenues is pegged at $7.74 billion, indicating year-over-year growth of 12.77%. The consensus mark for earnings is pegged at $2.58 per share, up 6.2% over the past 30 days and indicating 45.76% year-over-year growth.
Although the premium doesn’t justify the meager 0.13% dividend yield, we believe Vertiv’s growing dominance in the thermal management space for data centers is a major growth driver.
A strong liquidity position will not only help VRT sustain its aggressive expansion strategy but also pave the way for further increase in dividend payout over the long term.
Vertiv currently sports a Zacks Rank #1 (Strong Buy) and has a Growth Style Score of A, a favorable combination that offers a strong investment opportunity, per the Zacks Proprietary methodology. You can see the complete list of today’s Zacks #1 Rank stocks here.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Is VRT Stock's Premium Valuation Justified by its Dividend Potential?
Vertiv (VRT - Free Report) announced a cash dividend of 2.5 cents per share for shareholders (as of Sept. 17), payable on Sept. 26. Its current dividend yield of 0.13%, and its payout ratio is 5%, which we believe is sustainable given VRT’s improved liquidity position.
As of June 30, 2024, Vertiv’s cash balance totaled $579.7 million. Cash flow from operating activities was $378.4 million and free cash flow was $333.4 million for the second quarter. Overall liquidity strengthened to $1.2 billion.
VRT Shares Trade at a Premium
Vertiv’s sustainable dividend-paying capability is attractive to investors. However, we point out that VRT stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.
In terms of the trailing 12-month Price/Book ratio, VRT is trading at 18.32X, higher than its median of 13.32X and the broader Zacks Computer & Technology sector’s 9.35X.
Price/Book Ratio (TTM)
Image Source: Zacks Investment Research
Hence, the question that should arise in investors’ minds is – Is Vertiv’s growth prospect enough to support and eventually increase this dividend payout, and does it justify current premium valuation?
Let’s dig deep to find out.
VRT Shares Ride on Strong Order Growth
VRT shares have surged 62.4% year to date (YTD), outperforming the broader sector’s return of 16.5% and the Zacks IT Services industry’s appreciation of 4.6%.
It has been benefiting from strong order growth and backlog. Vertiv hit a backlog of $7 billion, which increased 47% year over year and 11% sequentially in the second quarter of 2024. Organic orders surged 57% year over year, and the book-to-bill ratio was 1.4 times.
This has helped VRT outperform its industry peers over the same timeframe, including ServiceNow (NOW - Free Report) and Infosys (INFY - Free Report) . INFY and NOW shares have gained 27.6% and 18.1%, respectively.
Vertiv now expects third-quarter 2024 order growth at low double-digits (10%-15% range) despite tough comparisons. On a trailing 12-month basis, the order growth rate is expected between 30% and 35%. Solid AI-related demand is expected to provide a tailwind to 2025 order and sales growth.
YTD Performance
Image Source: Zacks Investment Research
Improved Liquidity Aids VRT’s Prospects
Vertiv’s focus on reducing debt is commendable. Net leverage was 1.8 times at the end of the second quarter, which was within VRT’s stated leverage target range of 1 time to 2 times.
It repriced the existing seven-year term loan worth $2.1 billion that reduced interest expense by 61 basis points and resulted in interest savings of roughly $13 million per year.
Vertiv now expects 2024 free cash flow between $850 million and $900 million for 2024, reflecting improvement in profits.
VRT expects operating income between $375 million and $395 million, with a mid-point of $385 million for the third quarter of 2024. Adjusted operating margin is expected in the 19.4-19.8% range, with a mid-point of 19.6%.
Vertiv's Expanding Capacity to Support Clientele Growth
Vertiv is expanding capacity across liquid cooling, thermal, UPS, switchgear, busbar and modular solutions to accommodate AI-driven demand growth.
Next-generation chips that form the backbone for rapid adoption of AI liquid cooling are a must. It recently launched the MegaMod CoolChip, a liquid cooling-equipped prefabricated modular data center solution that is engineered to enable efficient and reliable AI computing.
An expanding partner base that includes the likes of Ballard Power Systems (BLDP - Free Report) and ZincFive is expected to drive top-line growth.
Ballard Power and Vertiv are collaborating on developing backup power applications for data centers and critical infrastructures, scalable from 200kW to multiple MWs. Vertiv has added the ZincFive BC Series UPS battery cabinets to its portfolio of battery systems available for data center backup power.
VRT’s FY24 Earnings Estimates Trending Upward
For 2024, Vertiv expects revenues between $7.59 billion and $7.74 billion, indicating an organic growth rate of 12-14% year over year. Non-GAAP earnings are expected between $2.47 per share and $2.53 per share.
The Zacks Consensus Estimate for 2024 revenues is pegged at $7.74 billion, indicating year-over-year growth of 12.77%. The consensus mark for earnings is pegged at $2.58 per share, up 6.2% over the past 30 days and indicating 45.76% year-over-year growth.
Vertiv Holdings Co. Price and Consensus
Vertiv Holdings Co. price-consensus-chart | Vertiv Holdings Co. Quote
Conclusion
Although the premium doesn’t justify the meager 0.13% dividend yield, we believe Vertiv’s growing dominance in the thermal management space for data centers is a major growth driver.
A strong liquidity position will not only help VRT sustain its aggressive expansion strategy but also pave the way for further increase in dividend payout over the long term.
Vertiv currently sports a Zacks Rank #1 (Strong Buy) and has a Growth Style Score of A, a favorable combination that offers a strong investment opportunity, per the Zacks Proprietary methodology. You can see the complete list of today’s Zacks #1 Rank stocks here.