Spin-Off And Fluke's New Products Will Boost Future Competitiveness

Key Takeaways

• Strategic spin-off and SaaS growth underscore Fortive's commitment to long-term growth and revenue enhancement.
  
• Proactive capital allocation and operational improvements aim to boost earnings and competitive positioning.
  
• Execution risks in strategic shifts, international revenue challenges, and heavy reliance on financial engineering could impact Fortive's margins, growth, and financial flexibility.

Catalysts

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

• Fortive's announcement of the spin-off of the Precision Technologies segment is a significant strategic shift expected to contribute to consistent value creation and reflect the company's commitment to long-term growth, likely impacting the company's earnings positively.
  
• The company’s emphasis on accelerating recurring revenue through strong subscription (SaaS) growth, particularly in the Advanced Healthcare Solutions segment driven by mid-teens growth at eMaint and Provation's novel product launches, is projected to support overall revenue growth.
  
• The ongoing focus on innovation, including historic new product launches at Fluke and growth in Intelligent Operating Solutions (IOS), enhances their competitive edge and product offerings, which is expected to bolster future revenue.
  
• Fortive's strategy to deploy 75% of free cash flow towards share repurchases ahead of the spin-off demonstrates a proactive capital allocation strategy aimed at boosting earnings per share (EPS) growth.
  
• Operational efficiency improvements and proactive restructuring initiatives, alongside strong adjusted operating margin expansion of 100 basis points, position Fortive to enhance net margins and earnings in 2025.

Fortive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortive's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.4% today to 19.8% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $4.25) by about December 2027, up from $889.3 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 25.3x on those 2027 earnings, down from 29.5x today. This future PE is greater than the current PE for the US Machinery industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Fortive Future Earnings Per Share Growth

Risks

• Fortive's separation of the Precision Technologies segment entails potential execution risks. This strategic shift could create transitional costs and operational distractions, potentially impacting net margins and earnings in the near term.
  
• Customers in certain sectors, such as Gordian's state and local clients, are delaying spending due to budget and macroeconomic uncertainties. This could negatively impact Fortive's revenue from software and service offerings.
  
• The company's exposure to international markets, particularly a high single-digit revenue decline in China, poses ongoing challenges and uncertainties, which might affect future revenue and growth expectations.
  
• The spin-off and restructuring processes, while aimed at optimizing operations, could introduce unforeseen operational challenges and dependencies that impact overall earnings and profitability.
  
• Continued share repurchases using free cash flow could partially offset EPS growth, but also signal reliance on financial engineering rather than organic growth, potentially impacting future financial flexibility and perceived earnings quality.

Valuation

• The analysts have a consensus price target of $87.68 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 $113.0, and the most bearish reporting a price target of just $77.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.5 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 25.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $75.73, the analyst's price target of $87.68 is 13.6% 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.