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Fortive: Poised to Continue Compounding Cash Flows

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After Fortive’s FTV 2023 investor day on May 25, we’ve increased our fair value estimate to $88 from $86, as we’ve modestly raised our long-term revenue growth and operating margin assumptions. The stock is currently trading in 4-star territory, which we see as an attractive entry point.

Management reiterated its full-year 2023 guidance and continues to expect core revenue growth of 4%-5.5% and adjusted EPS of $3.29-$3.40. Fortive also introduced 2028 financial targets and aims to deliver adjusted EPS of around $6.75 and free cash flow of over $2.3 billion (including contribution from M&A). The long-term outlook bakes in organic revenue growing at a 6% CAGR and core adjusted operating margins expanding by 90 basis points per year (higher than the 50- and 75-basis-point long-term guidance from the 2019 and 2021 investor days but lower than the 105-basis-point per year adjusted operating margin expansion since 2019). By segment, management guided to long-term core revenue growth in the midsingle digits in advanced healthcare solutions and precision technologies and midsingle digits-plus in intelligent operating solutions.

We reiterate our Exemplary capital allocation rating, based on management’s strong track record of M&A and driving operational improvement at acquired companies. Since 2016, Fortive has deployed roughly $7 billion of capital into M&A, adding around $2.5 billion in acquired revenue. Fortive has expanded the adjusted operating margin of the acquired companies by an impressive 1,000 basis points since acquisition. We believe that the firm’s M&A strategy has made the portfolio more resilient by boosting software and recurring revenue, which now combine for 44% of total revenue, up from 38% in 2021 and 18% in 2016. Furthermore, Fortive has grown its free cash flow from $0.6 billion in 2019 to around $1.3 billion, which we believe positions the company well to continue executing its compounding strategy.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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