Description

Summary

Vertiv holdings (“VRT” or “Vertiv”) is a leading supplier of power and thermal management products to attractive end markets, chiefly datacenters (70% of revenues).  VRT is a high-quality compounder with secular tailwinds, a legendary capital allocator at the helm, and is trading at a 25 to 40% discount to comparable peers. At <15x ’21 P/E and <12x ’21 EBITDA, the market does not appear to be giving the Company any value for future value to be generated from capital allocation, and is overly focused on the Company’s history as part of a conglomerate at Emerson.

Business and Background

Headquartered in Columbus, OH and employing over 20,000 people, Vertiv is a global leader in the design, manufacturing and servicing of critical digital infrastructure technology that powers, cools, deploys, secures and maintains electronics that process, store and transmit data.  The company mainly sells to data centers, communication networks and commercial & industrial companies, leveraging 270 service centers and 19 manufacturing and assembly sites.  As a pure-play full service provider of digital infrastructure solutions, the company generated $4.4bn in revenues in 2019, with 30% of revenues from power management, 20% thermal management, 7% IT management, 13% IT & Edge infrastructure and solutions, and 30% services.

VRT’s products are core and mission critical to the operations of datacenters as they provide energy and cooling infrastructure, as datacenters need VRT’s products to protect servers and create redundancies in power management to minimize downtime.  This creates a highly stable business as reflected in the fact that 60% of VRT’s revenues are generated from either replacing / expanding existing systems or maintenance service revenues – once VRT’s systems are installed, it is very rare for a customer to switch them out due to mission-critical nature of the products and the fact most data-centers are custom-built and optimized.

Vertiv’s market positioning is very strong as it is #1 in most end-markets served, with a TAM of $30bn growing 3-4% per year with its main competitors being Schneider Electric, Eaton, and Legrand

The competitive market is highly fragmented, with the top 3 manufacurting (including Vertiv) accounting for 21% of Power Management, 53% of Thermal Management, 41% of IT and Edge Infrastructure, and 28% of Services and Software Solutions TAM

Notably, Vertiv historically operated as Emerson’s Network Power business and was acquired by Platinum Equity in December 2016 for $4.2bn. Vertiv then merged with the Goldman Sachs Acquisitions Holdings Corp. SPAC in February 2020 at a $5.1bn valuation and former Honeywell CEO David Cote became executive chairman of the Company.    

Thesis / Opportunity

Growth opportunity

Opportunity to accelerate organic growth as new management under CEO Rob Johnson has re-focused the Company towards the faster growing cloud / hyperscale / colocation segment of the industry. Under Emerson, Vertiv had historically been focused on products for enterprise datacenters, which is currently growing at only a 0-2% annual rate. Vertiv believes it should be able to grow organically at a 4-6% revenue growth as it has made significant investments in its product lines as well as its organization since being acquired by Platinum Equity

Margin expansion opportunity

Vertiv has a significant opportunity for margin expansion as Vertiv’s EBITA margins are 500 to 700bps lower than competitors

While both ETN and SU’s competitor segments have more scale than VRT and thus should have higher margins,  SU’s precedent Secure Power segment had comparable revenues to Vertiv but still operated at a 500bps higher margin.

Furthermore, core investments and upgrades to VRT’s organization and IT infrastructure under Platinum Equity should give VRT substantial margin runway moving forward

Strong management team with proven track record and alignment

New Chairman David Cote has an exemplary track record of value creation during his time at Honeywell and will be an important mentor / guide to VRT’s management team.  Under Cote, Honeywell shares outperformed the S&P 500 by nearly 500% since January 2003 as he restructured the conglomerate and made numerous value-creating divestitures and acquisitions

Notably, Cote invested $20mm of his own capital into VRT as part of the February 2020 transaction with the GS SPAC – after spending over 6 months analyzing Vertiv during 2019, which would lead one to believe that he sees similarities between Vertiv and Honeywell, as Vertiv was poorly managed and underinvested in under Emerson and had a bloated and bureaucratic organizational structure that led to excess expenses and inefficient go-to market strategies.  Given that Cote’s core competency is around building an organization that is the most efficient at gaining operating leverage from incremental revenues, even low organic growth can lead to HSD EBITDA / LDD and low-teens EPS growth

Significant opportunities for value creation thru capital allocation as VRT is highly FCF generative

Vertiv should generate over $400mm of FCF per year which provides significant opportunities for acquisitions (i.e. consolidating the highly fragmented industry), debt paydown, or share repurchases

Re-rating of stock to peer group multiple

Putting it together, Vertiv’s margin opportunity and 3-5% organic revenue growth should drive significant EBITDA growth over the next 4 years, and we believe the stock will re-rate to a multiple closer to that of its peer group @ 13.5x EBITDA.  By 2024, based on 4.5% organic revenue growth and assuming EBITDA margin of 18%, the comany should generate $5.1bn of revenues and 915m of EBITDA.  Assuming a 13.5x multiple (which presumably the company would garner if it performs accrodingly) would create a $12.3bn EV and $35/share equity value, leading to an IRR of approximately 19% from today's price.  The price target does not incorporate additional upside from capital allocation decisions like acquisitions or share buybacks and assume VRT uses its cash to de-leverage its balance sheet. We believe it is highly unlikely that VRT will do nothing (particularly given the strong, shareholder oriented management team mentioned previously) with its cash but do not account for it in this base case.  Finally, note that the above “EBIT” number in the headline table mof this writeup is essentially EBITA, given the large amortization of intangibles and delta against capex (similar for cash EPS).

Risks

Technology risk – there is potential for changes in the way datacenters are designed and VRT’s products could lose its relevance if it is not able to keep up with the demands of its customers

Industry growth is becoming more concentrated – the enterprise datacenter industry is highly fragmented with many unsophisticated customers while hyperscale / cloud / colocation growth is more concentrated among the big technology companies like AMZN, GOOGL, and MSFT

Platinum Equity overhang – Platinum Equity still owns 29% of Vertiv and will likely be selling down its position from time to time, which could create overhangs on the stock

Relatively high leverage – 3.8x net debt / 2020e EBITDA

Catalyst

Margin expansion

M&A

Rerating/sellside coverage