Key Takeaways:
Current Price: $76 Price Target: $87 (under review)
Position Size: 2.19% 1-year performance: +7%
Fortive released 4Q18 results with sales up 7.4% organically (+11.4% reported), and adjusted EPS up 30% from last year (helped by lower interest expenses and lower tax rate). While China was highlighted as strong in 4Q18, the company did warn that there was some early buying that pulled forward some sales (70-100bps of growth) as companies were buying ahead of possible tariffs. Management thinks North America will remain solid in 2019, while Western Europe and China could experience some slowing down. Those assumptions are driving the 3% core top line growth guidance for 2019, and the high end of 5% assumes there is no slow down. Operating margins increased 40bps (excluding the recent acquisitions dilutive effect), helped by 80bps price increases. During the call, the company highlighted accelerating their portfolio transformation towards less cyclical markets and more secular growth drivers, also increasing in the recurring revenue base. This is part of our buy thesis on the name and reassuring to hear the transformation is going in the right direction.
2019 EPS guidance
Core sales of 3-5%, with 1% pricing
Core operating margins up 25-50 bps
EPS increase of 11-14% excluding the recent acquisition of ASP from J&J.
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