Is Fortive Corporation (NYSE:FTV) Worth US$74.79 Based On Intrinsic Value?

I am going to run you through how I calculated the intrinsic value of Fortive Corporation (NYSE:FTV) by projecting its future cash flows and then discounting them to today’s value. This is done using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for Fortive

The method

I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

2018 2019 2020 2021 2022
Levered FCF ($, Millions) $1.25k $1.36k $1.47k $1.50k $1.53k
Source Analyst x5 Analyst x5 Analyst x1 Extrapolated @ (2.29%) Extrapolated @ (2.29%)
Present Value Discounted @ 9.75% $1.14k $1.13k $1.11k $1.03k $963.88

Present Value of 5-year Cash Flow (PVCF)= US$5.37b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 9.8%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$1.53b × (1 + 2.9%) ÷ (9.8% – 2.9%) = US$23.23b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$23.23b ÷ ( 1 + 9.8%)5 = US$14.59b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$19.96b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of $57.27. Relative to the current share price of $74.79, the stock is rather overvalued at the time of writing.

NYSE:FTV Intrinsic Value June 29th 18
NYSE:FTV Intrinsic Value June 29th 18

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Fortive as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.8%, which is based on a levered beta of 0.965. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For FTV, I’ve put together three relevant factors you should further research:

  1. Financial Health: Does FTV have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does FTV’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of FTV? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.