Spinoff Of Precision Technologies Into Ralliant Will Unlock Value In 2025

Key Takeaways

• Fortive's innovation boosts revenue growth and efficiency, highlighted by R&D returns and AI-based products expanding market share and enhancing net margins.
  
• Strategic moves like Precision Technologies' separation into Ralliant and share repurchases focus on optimizing shareholder returns and resource allocation.
  
• Economic headwinds in China, EV market challenges, FX fluctuations, and high government exposure could hinder Fortive's revenue growth and pressure earnings.

Catalysts

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

• Fortive's acceleration in innovation in 2024, such as launching new products and enhancements, is driving strong top-line momentum and is expected to enhance revenue growth in 2025, as evidenced by contributions from various segments like IOS and AHS. This focus on innovation helps ensure greater returns on R&D investments, impacting revenue positively.
  
• The anticipated gradual recovery in Precision Technologies, driven by trends in power infrastructure and aerospace markets, coupled with ongoing innovation and FBS tools, suggests a return to core revenue growth in the second half of 2025. This could improve net margins through enhanced operational efficiencies and product offerings.
  
• The strategic separation of Precision Technologies into a new company, Ralliant, expected to close early in the third quarter of 2025, aims to unlock long-term value. This separation could optimize resource allocation, potentially improving earnings and shareholder returns.
  
• Fortive's ongoing share repurchase program, supported by record free cash flow, aims to prioritize return of capital to shareholders, which can drive earnings per share (EPS) growth and enhance shareholder value.
  
• The deployments of new AI-based product sets in 2025 and 2026, coupled with expanded market share efforts in high-growth sectors like energy storage and grid monitoring, are poised to support expanded market share and revenue growth, potentially improving net margins due to higher efficiency and cost-effectiveness from AI integration.

Fortive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortive's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.4% today to 18.9% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $3.8) by about March 2028, up from $832.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.9x on those 2028 earnings, down from 31.3x today. This future PE is greater than the current PE for the US Machinery industry at 22.1x.
• Analysts expect the number of shares outstanding to decline by 3.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

Fortive Future Earnings Per Share Growth

Risks

• Continued weakness in China and potential economic headwinds may affect Fortive's revenue growth, as China is a significant market for Fortive's products.
  
• The challenges in the EV mobility sector and broader semiconductor market could hinder the Precision Technologies segment's recovery and impact revenue.
  
• Foreign exchange headwinds could negatively affect Fortive's revenue and profit margins, as mentioned with an expected $90 million negative impact for 2025 based on FX fluctuations.
  
• High government-related exposure brings uncertainty around funds flow and demand, which could disrupt Fortive's revenue streams, particularly in sectors like aerospace and defense.
  
• Post-separation costs related to the spin-off of Precision Technologies and recurring public company costs could pressure earnings and net margins, potentially affecting Fortive's overall financial performance.

Valuation

• The analysts have a consensus price target of $90.228 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 $80.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.0 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $76.6, the analyst price target of $90.23 is 15.1% 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.