Fortive reported a good 4Q17 with sales growth of 11% (+3% organic) and adjusted EPS growth of 20.6%, mostly in line with expectations. Management provided its initial 2018 guidance of 3-4% organic sales growth and 16-19% EPS growth. We should expect some M&A activity during the year, with $5B available for deals. We are pleased with the results and maintain our position size and price target.
Current Price: $71.6 Price Target: $83
Position Size: 2.13% Performance since inception: +9.8%
Thesis Intact. Key takeaways from the quarter:
1.) 4Q17 cash EPS of $0.82 was ahead of consensus of $0.78.
a. Core sales growth of 3.1%, driven by high growth regions:
i. China up low double-digits
ii. Latam up high-single-digits
iii. Developed regions were up low-single-digits
b. Overall margins down 120bps, but core margins (ex M&A) up 50bps
2.) Initial 2018 guidance provided is above consensus but seems attainable
a. Organic sales growth of 3-4%:
i. China likely to be slower as comps are tough y/y due to recent semi capex cycle (impacting Tektronix)
ii. Software & services growing nicely, now attaining 25% of sales and expanding by 200-300bps this year
iii. EMV (fueling automation/chip embedded payments) growth higher in 2H18 on customer capex investments post tax reform
b. 50bps of core margin expansion
c. Tax rate of 20%
d. Adjusted EPS guidance of $3.35-3.45, head of consensus of $3.27. This represents a 16-19% EPS growth
e. $5B in M&A capacity ready to be deployed near term (mu interpretation that M&A will happen soon) vs. prior guidance of $5-7B to be deployed between 2017-2021
f. Fun fact (and a testament that Fortive is a diversified business): FTV was selected to provide the audio and video testing quality monitoring for the production of the Winter Olympics by NBC
g. Valuation unchanged at this point in time, the thesis is playing out as desired
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