Key Takeaways:
Overall we think the stock move yesterday was overdone, in light of results that were ok for 4Q (with miss due to delayed collection of sales) and FY22 guidance in line with long-term objectives. Fortive showed some strength in its business model, with the ability to grow operating margins in 2021 by 190bps while most companies suffered from inflation.
Current Price: $66 Price Target: $88
Position Size: 1.90% 1-year performance: 0%
Fortive (FTV) reported 4Q FY21 earnings yesterday. Largely due to continued supply chain constraints and the unexpected surge of Omicron, FTV missed on revenue (+1% vs 4-6% guide due to delayed sales) although adjusted operating margins expanded 210bps to 24.4%, a good indicator of the company’s flexibility and pricing power, something they have always talked about but that we can see playing out during hard times.
- Organic revenue growth of +1.0% (+3.8% total growth)
o Segments detail:
Ø Advanced Healthcare Solution -0.8% organic (25% of revenue): Consumables were down, yet seeing strong momentum from growth investments and pricing actions
Ø Precision Technologies +2.6% organic (35% of revenue): Some shipment challenges hindered growth, but was outweighed by strong demand and orders
Ø Intelligent Operating Solutions +0.8% organic (40% of revenue): Strong growth and momentum in orders, retention, and bookings
- Software-as-a-service grew low-20%: FTV is building scale and differentiation with its software offerings: bookings were up over 100% with continued strength in improved up-selling, cross-selling, and adding new customers. Expecting revenue to grow to roughly $950M in 2022.
- Adjusted operating margin 24.4%, +210bps: strong software demand, continued evolution of products, the acquisition of Provation, and robust expansion across all segments helped increase operating margin
- Even with continued supply chain constraints, management is expecting strong, sustainable organic growth and margin expansion due to high customer demand, secular tailwinds, and record backlog
- Maintaining capacity (~$5b) for M&A activity over the next 3 years – increasing assets increases FTV’s value proposition and positions within each segment
2022 guidance updated: expecting supply chain constraints to continue, but continued strengthening of orders, price realization, and software growth will help to more than offset disruptions
- Organic sales growth 5.5-8.5%: Fortive expects ramping up from ~3% in Q1 to ~10% in 4Q, with strong order book giving some assurance there. Recurring revenue are expected to be a bigger part of the mix, going from 38% in 2021 to 40% in 2022. Total sales growth guidance of 9-12%
- Adjusted gross margins of ~59% at the mid-point (from 57.4% in 2021)
- Adjusted operating margins at 24-24.5%, expanding 90-140bps from volume recovery, pricing action and continues performance initiatives
- 2022 guidance for adjusted EPS $3.00-$3.13, up 9-14% y/y
- Anticipating strong free cash flow (20% FCF margin), with ~25% growth expected this year
Where could they outperform? I think their assumptions on the healthcare sector is conservative (no growth in elective procedures in 2022 from 2021). Supply chain constraints could ease faster than expected (they expect constraints throughout 2022).
Aside from earnings results, Fortive has provided an update on the ESG front. Overall data provided looks good vs. peers especially on the emissions reduction targets and diversity (board, supplier program).
Thanks,
Julie & Micah
FTV Thesis:
- Market leader:
- Leadership position in most of the markets they serve
- Experienced leadership team
- Above industry margins with strong cash flows
- Quality:
- Estimated 2022 FCF yield ~5%
- Organic growth target of 1.5-4.5%
- 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
- Aiming to reduce GHG by 50% by 2025 (compared to 2017 levels)
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FTV.US
Category: earnings
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