Back in October, I called Fortive Corporation (NYSE:FTV) an interesting and well-positioned conglomerate. Despite solid positioning, the company’s shares have been trading rather stagnant since the company was spun off from Danaher (DHR) back in 2016.
Part of that comes as the company spun off Vontier (VNT) in 2020, which hurt the headline share price developments from Fortive, but investors, of course, enjoyed the benefits of that spin-off. With shares still somewhat underperforming, valuation multiples over time have come down to market multiples. While the start to 2024 has been relatively soft, I am getting more compelled toward the shares here, certainly on (further) dips.
A Well-Positioned Conglomerate
Fortive is a collection of high-quality, high-growth and profitable businesses. The company operates in three segments being: intelligent operating solutions, precision technologies and advanced healthcare solutions. The first two of these segments each make up roughly 40% of sales (while posting higher margins) with the advance healthcare solution being smaller and less profitable.
These activities focus on connected reliability, environmental health & safety, facility & asset lifecycle, product realization and perioperative loop. These are geared to critical customer workflows, domain expertise, among others, as by now the company generates about half of sales from recurring revenue sources.
The company has grown from a $4.5 billion revenue base pre-pandemic to more than $6 billion by now, as adjusted earnings rose from $2 per share towards $3 per share in 2022, as the company even has a goal to grow these earnings to $6 and change in 2028.
Through October of last year, the company has seen solid momentum, with first quarter sales up 6%, and second quarter sales up 4%. For the year 2023, the company guided for sales around $6.10 billion, with adjusted earnings seen at a midpoint of $3.39 per share. Net debt of nearly $2.3 billion was relatively modest, with EBITDA trending at $1.6 billion.
With shares trading in the low seventies, a 22 times multiple looked reasonable amidst solid mid-single digit organic growth and modest leverage, although that a fair valuation seemed to be a fair conclusion. For appeal to be seen, I was awaiting a chance to obtain an entry point in the sixties.
Downs And Ups
Since October, shares of Fortive initially fell to the mid-sixties in November as the third quarter results came in a bit soft. What followed was a big run higher to levels in the mid-eighties in February, after which shares have now fallen back to the mid-seventies mark here.
Towards the end of October, the company announced a $1.45 billion deal to acquire EA Elektro-Automatik, a provider of test & measurement solutions. The Germany company supplies high-power electronic test solutions for energy storage, mobility, hydrogen and renewable energy applications, with the purchase price already accounting for $215 million in tax benefits.
Unfortunately, few financial details on the purchase have been announced at the time. While the deal is substantial in dollar terms, it compares to an enterprise valuation of around $27 billion at $70 per share, as the deal was really equivalent to just about 6% of the prevailing valuation.
Shares plunged a few days later as third quarter sales growth slowed down to 2% and change, causing the company to reduce the full year sales guidance to a midpoint of $6.05 billion, with the midpoint of the earnings guidance essentially been cut intact at $3.385 per share. In January of this year, the company closed on the deal with EA, as later in the month the company posted its 2023 results.
Fourth quarter sales growth recovered to 4% as full-year sales came in at $6.07 billion, with adjusted earnings per share reported at $3.43 per share, coming in exactly a dollar head of the GAAP numbers. That said, as the vast majority of the reconciliation comes from amortization charges, which I am happy to adjust for, and hence we can use the adjusted earnings numbers for the investment case. The company guided for 2024 sales to advance to a midpoint of $6.45 billion, with adjusted earnings seen at a midpoint of $3.79 per share, plus or minus six cents.
This, however, includes the near full-year contribution from EA Elektro-Automatik, except for a couple of days. Just ahead of the closing, pro forma net debt would come in at $3.4 billion. With the own business generating about $.17 billion in EBITDA, forward-looking leverage ratios would fall below 2 times.
On the conference call, management indicated that acquisitions would contribute about $215 million in 2024 sales, with core sales growth seen between 2 and 4% for 2024. This suggests that EA at best contributing about $215 million in sales (absent of other acquisitions), suggesting that including tax benefits, a near 8 times sales multiple has been paid. This is quite a lot higher than the 4-5 times sales multiple at which Fortive trades here.
And Now?
Towards the end of April, the company reported somewhat weaker first quarter results, with reported sales up 4% and change to $1.52 billion, with adjusted earnings up 11% to $0.83 per share.
The softer sales growth, even as core sales growth came in at 3%, meant that the company actually cut the full year sales guidance to a midpoint of $6.39 billion. At the same time, the company hiked the midpoint of the earnings guidance by two and a half pennies to $3.815 per share.
Net debt is reported at $3.2 billion and change, already marking some deleverage from the end of 2023 (on a pro forma basis). With EBITDA trending at around $1.8 billion a year, leverage is no issue at all, with ratios down to about 1.8 times. With shares now dead flat at $74, earnings multiples have come down to 19–20 times earnings, which looks a lot more reasonable already, although I am not too pleased with a softer revenue start to 2024.
Weighing it altogether, I am not too impressed with the current Fortive Corporation performance. However, the overall valuation has grown significantly more friendly here. That said, to see real appeal, I would like to see a bit more compelling valuation, so I am reiterating my willingness to get involved in the sixties.