Separation And Recurring Revenue Focus Will Unlock Future Value

Key Takeaways

• Strategic separation into two companies aims to focus growth and improve revenue and earnings by enhancing individual growth strategies.
  
• Emphasizing high-growth, recurring revenue streams and efficient capital uses could stabilize revenue and improve margins.
  
• Political and economic uncertainties, tariffs, and global market softness are creating revenue, margin, and profitability challenges for Fortive.

Catalysts

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

• Fortive is planning a strategic separation into two focused companies, New Fortive and Ralliant. This separation is expected to unlock value and focus each entity on their respective growth strategies, likely impacting revenue and net earnings positively.
  
• The company is actively mitigating tariffs through strategic pricing, regional manufacturing adjustments, and logistical optimizations. These countermeasures are expected to fully neutralize tariff impacts by the fourth quarter of 2025, potentially benefiting net margins.
  
• Fortive's focus on high-growth, recurring revenue streams, particularly in the software and services sectors, represents a significant forward-looking growth catalyst. Expanding their recurring revenue business to 50% of total revenue after the separation is expected to enhance revenue stability and improve net margins.
  
• The recent appointment of a new CFO, Mark Okerstrom, known for accelerating profitable growth and disciplined capital allocation, is anticipated to drive shareholder value by identifying and optimizing efficient capital uses, potentially benefiting net margins and earnings.
  
• New product initiatives, especially in sectors like solar and EV storage, along with innovation drives in data centers and healthcare (e.g., SaaS conversions at Provation), are projected to augment organic growth across segments, impacting revenue and eventually earnings over the long term.

Fortive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortive's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.9% today to 19.1% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $3.93) by about May 2028, up from $797.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, down from 28.7x today. This future PE is greater than the current PE for the US Machinery industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 3.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

Fortive Future Earnings Per Share Growth

Risks

• The delayed recovery in Precision Technologies due to political and macroeconomic uncertainty suggests declining demand in this segment, impacting Fortive’s revenue and earnings.
  
• The newly announced tariffs are expected to have a negative gross impact of $190 to $220 million this year, with mitigation only expected to be fully realized by the fourth quarter, potentially affecting operating margins and net income in the meantime.
  
• Adverse effects of foreign exchange rates and shipment delays in segments such as Sensors and Safety Systems could further pressure Fortive’s gross margins and net income.
  
• The slowing demand in the Test and Measurement business suggests broader market softness, particularly in China and Western Europe, which could lead to lower revenue growth and challenges in expanding net margins.
  
• The evolving policy and trade landscape, including potential new tariffs and resulting gross margin pressures, introduces uncertainty that could hinder Fortive’s pricing strategies and profitability in the short term.

Valuation

• The analysts have a consensus price target of $82.859 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 $121.0, and the most bearish reporting a price target of just $67.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.2 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $67.25, the analyst price target of $82.86 is 18.8% higher.
  
• 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.