Recurring Software Trends Will Secure Resilience Amid Tariff Uncertainty

Key Takeaways

• Expansion of recurring revenues, digital innovation, and smart industry trends are set to drive sustained growth, increased margins, and market expansion.
  
• Operational discipline, strategic acquisitions, and backlog conversion are expected to boost cost efficiency and support near-term earnings recovery.
  
• Greater segment concentration, fiscal tightening, trade volatility, M&A execution risk, and healthcare headwinds heighten uncertainty for revenue growth, margin stability, and future earnings quality.

Catalysts

Designs, develops, manufactures, and markets products, software, and services in the United States, China, and internationally.

• Fortive's increasing mix of recurring revenues-now at 50%-through expansion of software, services, and subscription models, including double-digit ARR growth at key brands like Fluke and SaaS momentum at AHS, is expected to drive improved revenue visibility and margin expansion in future periods, supporting both top-line growth and higher net margins.
  
• The company is positioned to benefit from long-term infrastructure investment, smart city, and industrial automation trends, as evidenced by robust demand for building automation, reliability solutions, and advanced measurement tools, which are anticipated to expand Fortive's addressable markets and accelerate revenue growth over the medium to long term.
  
• Successful execution of the Fortive Accelerated strategy, with an explicit focus on innovation (e.g., AI-enabled customer experience upgrades, launch of award-winning instrumentation, strong new product funnels), is aimed at leveraging digital transformation and increasing IoT adoption across end markets, supporting sustained future revenue growth and margin improvement.
  
• Ongoing operational excellence via the Amplified Fortive Business System and disciplined capital allocation-including targeted bolt-on acquisitions in niche software and analytics-are expected to deliver further cost productivity, improved net margins, and robust free cash flow conversion.
  
• Tariff-related cost pressures and temporary customer demand deferrals in Q2 have caused near-term revenue volatility and may be weighing on valuation, but management expects deferred orders (building backlog) to convert in subsequent quarters and for full implementation of pricing and supply chain countermeasures to restore or improve gross margins and earnings, providing a near-term catalyst for earnings normalization and potential upside.

Fortive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortive's revenue will decrease by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.5% today to 16.5% in 3 years time.
• Analysts expect earnings to reach $741.9 million (and earnings per share of $2.05) by about September 2028, down from $768.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.8x on those 2028 earnings, up from 21.0x today. This future PE is greater than the current PE for the US Machinery industry at 24.7x.
• Analysts expect the number of shares outstanding to decline by 2.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.69%, as per the Simply Wall St company report.

Fortive Future Earnings Per Share Growth

Risks

• The spin-off of the Precision Technologies segment (now Ralliant) leaves Fortive more focused but also exposes it to higher concentration risk in its remaining segments, potentially reducing diversification and increasing earnings volatility in the face of segment-specific headwinds (impacts revenue and earnings stability).
  
• Prolonged government fiscal tightening and constrained state/local spending, as highlighted by Gordian's weak year-end results, could lead to slower recovery and unpredictability in recurring public sector end-markets, affecting core revenue growth and organic acceleration objectives (impacts revenue and recurring growth).
  
• Persistent U.S.-China tariff uncertainty and broader volatility in global trade policy remain acute headwinds, with the company citing significant quarterly revenue and gross margin drag from both direct tariff expenses and deferred customer demand; ongoing or escalated trade frictions could continue to pressure margins and limit revenue visibility (impacts gross margins and near-term/long-term revenue).
  
• Ongoing reliance on bolt-on M&A, even with stricter financial scrutiny, introduces integration and execution risk, particularly after a period of management transition and organizational re-focus post-spin, which could dampen net margin improvement and jeopardize anticipated synergy realization (impacts net margins and future earnings quality).
  
• The Advanced Healthcare Solutions (AHS) segment faces structural pressure from U.S. health care reimbursement policy changes and delayed hospital capital spending, with management indicating no near-term improvement expected; extended softness here risks eroding overall growth, especially as comps toughen and organic innovation may lag digital-first competitors (impacts segment revenue and operating margin trajectory).

Valuation

• The analysts have a consensus price target of $60.5 for Fortive based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $116.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.5 billion, earnings will come to $741.9 million, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 8.7%.
• Given the current share price of $47.71, the analyst price target of $60.5 is 21.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.