Key Takeaways:
Current Price: $73.30 Price Target: $87
Position Size: 2.09% 1-year performance: -1.4%
Fortive released 3Q18 results with sales +9.2%, of which organic growth was +3.2% (below expectations), acquisitions added +7.2% and FX removed 1.2%. Gross margins grew 40bps to 50.2% but SG&A expenses increased 410bps, leading Fortive’s core margin down 25bps (reaching 17.5%). Both tariffs and inflation of raw materials impacted gross margins, while hurricane Florence and unfavorable portfolio mix impacted operating margins. EPS grew +11.7% y/y. Free cash flow increased 23% y/y on better operating cash flow. 4Q18 revenue growth acceleration is expected as some hurricane-related backlog in 3Q will be fulfilled in 4Q. There were also some delays with defense contractors during the quarter that have since been reversed in October. We heard some positive comments on a new fast-charging station technology for electric vehicles that can be globalized with their large-scale network clients (gas stations for example). Their core Gilbarco business (card readers at gas stations) is seeing an acceleration as well. Pricing is increasing towards the end of the year. Even though this quarter saw some one-time items impacting revenue growth and margins, the thesis on this name remains intact.
· 3Q18 comments: high growth markets and the US performed well, while Western Europe was more challenging (low-single digits sales decline)
· Updated 2018 guidance: the Gordian and Accruent acquisitions are adding $0.07-0.08/share to EPS. The split-off net impact is $0.52/share. EPS now guided to $2.98-3.02. Core revenue growth of ~4%, core operating margin expansion of 50bps
· 4Q18 guidance: expect acceleration to 5-6% core revenue growth (evenly distributed across businesses), core operating margin expansion of 75-100bps
· Tariffs: $0.01-0.02/share incremental negative impact to earnings. Fortive has been changing its supply chain and moving production sites to offset some of the tariffs impact. The total dollar impact is thought to be $50-70M
· Initial 2019 comments: recurring revenue now accounting for 30% of sales, gross margin 50%+. Expect moderated growth in China, steady North America, and mixed EMEA. Tariffs should be fully offset by 1Q19. Core operating margin to increase 50bps.
FTV Thesis:
– Market leader:
· Leadership position in most of the markets they serve
· Experienced leadership team
· Above industry margins with strong cash flows
– Quality:
· FCF yield ~5%
· Organic growth target of 3-3.5% (4-5% in last 2 quarters after being under the target in prior quarters)
· M&A strategy to enhance top line growth
· Margins expansion from new products introduction, continued application of the Fortive Business Systems and M&A integration
– Shareholder friendly:
· Management team focused on shareholder wealth creation through top line sustainability and margin expansion
$FTV.US
[tag FTV]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109