Shares of Fortive Corporation (NYSE:FTV) have seen stagnant results (at least its share price) if we compare the current share price to the situation soon since it was spun off from Danaher (DHR) in 2016. Subsequently, Fortive has been a publicly traded business for some seven years, as the business shrank further following its spinoff of Vontier (VNT) in 2020.
The many moving parts somewhat reveal that Fortive has become a nice and specialized conglomerate, and amidst a solid performance and a low twenty times earnings multiple, valuations look reasonable. That being said, we find ourselves in a high interest rate environment, making me inclined to get involved if the multiple drops just below the 20 times multiple.
An Intro To Fortive
Fortive is a collection and portfolio of three segments: intelligent operating solutions, precision technologies and advanced healthcare solutions. The first two segments are the largest, each responsible for roughly 40% of sales (accompanied by higher margins) with the latter segment being the smallest and less profitable segment. These activities focus on connected reliability, environmental health & safety, facility & asset lifecycle, product realization and perioperative loop.
Pre-pandemic, this was a $4.5 billion business which by now has grown sales to $6 billion, while growing margins as well. This made that 2019 (adjusted) earnings of around $2 per share advanced to over $3 per share in 2022 as the company has a goal to more than double earnings to $6 and change in 2028.
After the business was spun off from Danaher in 2016, shares traded around the $40 mark, rose to the $60 mark a year later, and have largely traded in a $60-$80 range in the period thereafter, now trading at $74 per share.
Putting this share price into perspective: in February, Fortive posted an 11% increase in 2022 sales to $5.83 billion as the business is highly profitable with GAAP operating profits reported at $987 million. GAAP earnings were reported at $755 million, equal to $2.10 per share. Adjusted earnings per share rose forty cents to $3.15 per share, as pretty much all the earnings per share difference is the result of amortization charges, making it fair to adjust for these items.
Net debt was posted at $2.5 billion, a very manageable net debt load as EBITDA approached $1.5 billion that year. For 2023, Fortive guided for modest growth with sales seen between $5.95 and $6.10 billion, with adjusted earnings seen between $3.25 and $3.40 per share. Unlike some previous years in which acquisitions played a major role in transforming the business, it has been quieter on this front in recent times.
2023 – Modest Gains So Far
Fortive posted a 6% increase in first quarter sales to $1.46 billion, with adjusted earnings rising in tandem, up five cents to $0.75 per share. Following this decent quarter, the company hiked the lower end of the sales guidance to $6.0 billion, with the lower end of the earnings range hiked by four cents to $3.29 per share.
In July, second quarter sales rose some 4% to $1.53 billion, with adjusted earnings per share up nine percent to $0.85 per share. Full year sales are now seen around $6.10 billion, with earnings now seen between $3.36 and $3.42 per share. Net debt was reported at $2.27 billion and this is gradually coming down, certainly on a relative basis, as EBITDA comes in around $1.6 billion here. This leverage ratio is rapidly coming down, as the company is quite disciplined with capital allocation, paying a mere $0.07 per share quarterly dividend here.
A $65 stock this spring has risen to the $80 mark over the summer (to now settle at $74) as investors like the solid operation momentum, with the guidance hiked two quarters in a row. This values the business at 21-22 times earnings, a reasonable multiple given the solid organic growth of the business and modest leverage ratio, although the sub 5% earnings yield should be seen in the light of risk-free rates which surpass this earnings yield of course.
And Now?
The reality is that I like Fortive Corporation from a positioning point of view, but it is clear that the company has been underperforming its former parent since the spinoff, as shares have traded largely flattish since the period soon after the spinoff from Danaher. The overall positioning and valuation look reasonable, but any >20 times earnings multiple in this interest rate environment has to compete in a harsh fashion compared to risk-free rates.
The two hikes this year are comfortable, all happening at a time when acquisition activity is subdued, as greater earnings and lack of major capital allocation decisions rapidly reduced leverage to just over 1 times EBITDA here.
This is quite compelling, although I am mindful that Fortive Corporation was a stock in the mid-sixties this spring, with shares trading some ten dollars higher than those levels here today. Given this I am happy to place this stock on my watch list, I am looking to add Fortive Corporation shares on dips to the higher sixties here, but not being in a rush to get involved here.
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