Description

Trimble Navigation should release lower than expected revenue and earnings after the close on Tuesday afternoon. How do I know this? Their precision agriculture business, which is called Field Solutions is estimated to be flat to up for q1 and that is basically impossible without a massive inventory channel stuffing. Analysts are deluding themselves about continued strength and for some reason are ignoring severe weakness already reported by smaller rivals. Already trading at a rich 17-18 times fiscal 2009 earnings that are sure to plummet, Trimble could easily retest its 2009 lows of $12 per share or 40% lower than current prices.

Hemisphere GPS and Novarient report dramatic decline in precision ag revenues

Hemisphere GPS (Toronto: HEM) reported last week revenue fell 31% year over year. March has turned out to be much weaker than expected as farmers decided not to buy despite indications showing they would earlier in the year.

Also, private comparable, Novarient, is rumored to have seen a sales decline of 40%. Yet analysts expect Trimble to report flat to higher year over year numbers. Based upon my research and these pure play companies’ reports, there is no way that Trimble can report flat to positive revenue growth.

Majority of revenue should be very weak for some time due to economic cyclicality

Trimble’s largest revenue contributor, the engineering and construction division, is very economically cyclical and should show dramatic declines. With Catepillar (NYSE: CAT) announcing a 30% year over year decline in sales and other industrial and construction companies reporting terrible numbers it is unlikely that this could post a surprise.

Longer term, the terrible problems in commercial real estate are just starting to rear their head and this business should be weak for a long, long time.

William Blair upgrade causes unwarranted surge

The day that Hemipshere announced terrible results, William Blair came out with a big upgrade saying that the agriculture business is “still healthy.” They actually increased estimates for the quarter and have TRMB reporting a 10% increase in revenue! And pigs can fly.

This fundamentally wrong report during a surge in the market gave wings to the stock, when it really should have fallen. Now I know the market is levitating here, but this is bizarre. TRMB should have fallen sharply on the release of HEM’s numbers.

Valuation seems extreme for a company whose revenue is in free fall

The stock trades for 17-18 times consensus estimates, estimate that are sure to fall. Also, TRMB trades for almost 2 times revenue and two times book value.

Now investors can easily go out and buy Hemisphere for 0.2 times sales and below book. I’m not sure how to reconcile the vast valuation gap besides that TRMB is on the NASDAQ and that there is some huge flow of funds into stocks recently.

I estimate that TRMB would be lucky to earn $0.85 this year. A healthy 15 multiple gives you a $13 stock price, which I would argue is still expensive.

Summary

TRMB is up 67% from its bottom and is about to report terrible results. I think that it could easily retrace its recent gain. I think it is an excellent short sale candidate, especially with less than 5% of the float short.

Catalyst

-q1 earnings report after the close Tuesday the 28th