Fortive Corporation: Raised Outlook As Demand Remains Resilient

Summary

• Fortive Corporation has shown strong growth with a CAGR for revenues of 13.15% and raised guidance after the first quarter of 2023 due to persistent demand.
• The company, which designs and manufactures engineered products and software, has a diverse revenue stream and significant recurring software revenues.
• Despite potential risks linked to the global economy, the company is seen as a good long-term investment due to its strategic acquisitions and robust free cash flow.

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Investment Rundown

The last couple of years for Fortive Corporation (NYSE:FTV) has shown strong growth as CAGR for revenues is 13.15%. This momentum seems to persist as the operational performance in the first quarter to 2023 showcased persistent demand and resulted in FTV raising guidance.

FTV operates as a designer and manufacturer of several engineered products and software provide worldwide. The revenue streams are diverse and FTV has managed to set up a significant amount of recurring software revenues, making future earnings sustainable to grow upon. The raised guidance though from the last quarter seems to have significantly set the share price for FTV and the FWD P/E sits at 22 right now. That still isn't too high for my liking, and I view FTV as a very appealing investment opportunity now. I think investors need to accept that sometimes you won't see the preferred price targets for entering a position. I find it unlikely FTV ever reaches a p/e of 15-16 where it would be a no-brainer to add. Because of this, you have to view it as a long-term addition, and adding a little above is not going to be that noticeable in 10 years. I believe in FTV and with a historical record of making strategic acquisitions, I think the healthy financial state of the business sets them up to continue this trend going forward. I am rating FTV as a buy now.

Company Segments

Fortive hasn't been in operations for that long actually, only since 2015, but has despite that grown the business into a $26 billion valuation. This growth has been driven by strategic acquisitions during the years to build upon the revenue streams they have established.

Revenue Mix (Q1 Presentation)

During this time, FTV has built up a strong revenue profile where a large amount is coming from recurring revenue streams. This fortifies future earnings reports and makes it easier to continue expanding. The Q1 report of 2023 for example showed FTV was able to grow its top line above expectations at 6% and core revenues grew by 9% YoY. In the face of higher interest rates and a market environment where many industries are seeing softer demand, a surprise like this makes the valuation justifiable in my opinion.

Q1 Revenues (Q1 Presentation)

Looking at the structure of FTV, the revenues come from three primary sources, Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions. The first segment still makes up the largest portion of the revenues at $632 million. But the most momentum was seen in Precision Technologies, which grew revenues by 11.5% YoY and operating margins grew by 190 bps YoY. The smallest segment also saw the most challenges. FTV noted that industry challenges were persistent in the quarter, and the China and Russia headwinds that were expected helped make the segment struggle. Some supply chain constraints were experienced that stalled shipments of FHS.

Upcoming Report

On July 26 FTV will be posting its Q2 results for 2023 and given the outlook they had back in Q1 growth will continue. Core revenues are expected to rise 2.5-4.5%. A beat would prove the resilience of FTV and its ability to grow faster than the market even as challenges persist.

Q2 Outlook (Q1 Presentation)

Watching the FCF will also be a key point. Here, strong FCF conversion will lend the company to make more acquisitions and fuel growth. But they are also buying back shares it seems, and with robust FCF the likelihood of more buybacks increases. I will also be looking at whether the healthcare solutions segment can see a recovery or not. If it continues to be a drag, then it will likely result in the share price remaining quite flat after the report. The segment still generated around 20% of the revenues, and persistent struggles will lead to pessimistic outlooks.

Risks

FTV's performance is intricately linked to the overall state of the global economy. A prolonged recession or economic slowdown could pose considerable challenges for the company, affecting its revenue and profitability. This, in turn, may impede FTV's ability to accumulate FCF for crucial acquisitions and business improvements. Furthermore, such economic conditions could potentially hinder the smooth integration of current acquisitions, resulting in stagnant growth for the company.

To mitigate these risks, FTV should carefully assess market trends and adapt its strategies accordingly. Diversifying revenue streams and exploring opportunities in less cyclically-sensitive industries might help the company maintain a more stable financial position during economic downturns. Additionally, prudent cost management and efficiency measures can enhance resilience during challenging times. By proactively addressing these challenges, FTV can better position itself for long-term success and growth, even in the face of economic uncertainties.

Final Words

Since its founding year in 2015, FTV has grown into a significant position and now has a market cap of $26 billion. Growth has been fueled by acquisitions throughout the year, and with a great diversification of revenues, they have set up a good amount of recurring revenues.

The share price rose quite quickly following the last earnings report, where the management of FTV raised guidance for 2023. I don't think paying 22x FWD earnings is necessarily that high when seeing margins be so high. FCF conversion is estimated to be 100-100% in 2023 and net margins are 11% higher than FTV's historical average. I am rating FTV a buy right now.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.