Hexagon's Divestiture of Tesa PMI: A Strategic Bet on Margin Expansion and Capital Reallocation

Hexagon AB (HEXAB.ST), the Swedish multinational leader in sensor, software, and autonomous solutions, has made a bold move in recent months by divesting its Tesa PMI (Precision Measurement Instruments) business to Hangzhou Great Star Industrial Company Ltd. The deal, finalized in early 2024, underscores a growing trend in corporate strategy: shedding underperforming assets to focus capital on high-margin, growth-oriented segments. For investors, the transaction offers a window into Hexagon's broader vision to transform its portfolio, boost profitability, and position itself as a leader in the digital reality solutions space. Here's why the move matters—and what it means for shareholders.

The Divestiture in Context

The Tesa PMI business, which manufactures precision measurement tools like micrometers and calipers, reported €50.9 million in revenue in 2022. While modest compared to Hexagon's total €5.2 billion in net sales that year, its profitability lagged behind the group average within Hexagon's Manufacturing Intelligence (MI) division. This subpar performance, combined with the business's limited growth potential in an increasingly commoditized market, made it a prime candidate for divestiture.

Hexagon has long prioritized its higher-margin segments, such as its Asset Lifecycle Intelligence (ALI) division and digital reality solutions (e.g., 3D scanning and positioning systems). These areas, which accounted for over 80% of its 2022 sales, offer stronger growth trajectories and recurring revenue models. By offloading Tesa PMI, Hexagon can reallocate capital toward these priorities, potentially accelerating margin expansion.

The Case for Margin Improvement

The transaction aligns with Hexagon's stated goal of achieving an adjusted operating margin of 18-20% by 2025, up from 16.4% in 2023. Tesa PMI's below-average profitability likely dragged down the MI division's margins, and its removal could free up resources to invest in higher-margin activities. For instance, Hexagon's recent acquisitions of Voyansi Geosystems and Itus Digital—both ALI-focused firms—highlight its commitment to consolidating its position in data-driven industrial solutions.

This data would show a gradual rise from ~15% in 2020 to an estimated 17-18% in 2024, illustrating the company's margin expansion trajectory.

Risks and Uncertainties

Critics may question the lack of disclosed financial terms for the Tesa PMI sale. Without knowing the proceeds, investors cannot fully assess the deal's immediate impact on Hexagon's balance sheet or cash flow. However, the transaction's strategic logic is clear: Hexagon is making a long-term bet that focusing on its core strengths will yield higher returns than maintaining a lower-margin business.

Moreover, the buyer, Hangzhou Great Star—a Chinese industrial giant with €2.0 billion in 2022 revenue—sees Tesa PMI as a strategic fit to bolster its precision measurement capabilities. This synergy suggests the deal was likely priced competitively, with Great Star valuing Tesa PMI's brand and engineering expertise in Switzerland.

Investment Implications

For investors, Hexagon's move reinforces its disciplined capital allocation approach. The stock, which has underperformed peers like Trimble Inc. (TRMB) in recent years, could see a valuation rerating if margins improve as promised. Key catalysts include:
1. Margin Expansion: Confirmation in Q1 2024 earnings of a sustained upward trend in operating margins.
2. Pipeline Execution: Successful integration of recent ALI acquisitions and organic growth in digital reality solutions.
3. Debt Management: Use of proceeds (if disclosed) to reduce leverage or fund R&D.

While the Tesa PMI sale alone may not move the needle materially, it is part of a broader portfolio reshaping. Investors should monitor Hexagon's Q2 2024 report for further details on the transaction's impact and progress toward its margin targets.

Conclusion

Hexagon's divestiture of Tesa PMI is less about a single asset and more about a strategic pivot toward higher-value segments. By cutting ties with a business that no longer aligns with its growth ambitions, Hexagon signals its intent to prioritize margin expansion over incremental revenue. For shareholders, this is a positive step—but execution will be key. If Hexagon can sustain margin improvements while capitalizing on its digital solutions, the stock could emerge as a compelling play in the industrial tech sector.

This comparison would highlight Hexagon's relative underperformance and potential upside if strategic moves bear fruit.

Investment Thesis: Buy Hexagon with a 12–18 month horizon if margin expansion materializes, but remain cautious until the company provides clearer financial metrics on its portfolio reshaping efforts.