Fortive: Poised to Continue Compounding Cash Flows

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.