Key Takeaways:
· Slow down continues in short-cycle business but had some stabilization in North America
· The Fortive Business System (concept of continuous improvement) has proven its value with margin expansion despite the top line slow down
· The filing for the IPO of Vontier is targeted for Q1 2020 but the management team wants to do things when time is right
· We still see upside to the current company, but we’ll have to re-evaluate the stock once we get more information on the 2 entities later this year
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Current Price: $78.5 Price Target: $86 (updated last quarter)
Position Size: 2.27% 1-year performance: +4.6%
Fortive released its 4Q19 earnings, with core sales growth of 0.4% (+14% reported due to recent acquisitions), a continuation of prior quarters slow down. But Fortive showed its strength in leveraging the business even with slower sales: margins expanded 60bps (+150bps excluding recent M&A) and EPS increased 13%. FCF also increased this quarter, up 17% y/y.
The short-cycle businesses continue to face a slowdown (Fluke & Tektronix) in China and Western Europe but North America is stabilizing. The retail fueling upgrade continues to grow in the US (with an October 2020 deadline to convert the stations to the chip enabled payment centers). Their GVR business is gaining traction in installing EV- charging stations in its legacy client base. And at Matco, new products introduction is driving sales growth in the MSD rate.
The management team introduced its 2020 guidance:
· Core Revenue Growth (Y/Y): low single digits
· Core operating margin: +50bps
· Adjusted Operating Margins: ~22%
· Adjusted Diluted EPS: $3.68 to $3.78 (+6% to +9%)
· The coronavirus is expected to have a minus impact ($0.02/share) in Q1
By the end of 2020, Fortive will separate into 2 companies: Fortive (the industrial technology company) and Vontier (the retail and commercial fueling, fleet management, and automotive service and repair solutions). So far, FTV has accomplished the following steps towards the split: announced key members of the senior management team, launched the brand, and made progress against other significant milestones over the past few months.
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
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