Fortive Gets Positive Opinion From Morgan Stanley Into IPO

Morgan Stanley’s Nigel Coe believes the spinoff of Fortive Corp FTV from Danaher Corporation DHR is likely to surprise to the upside with its quality. Additionally, the analyst sees the stock potentially trading “very rich” post-spin.

Coe initiated coverage of Fortive with an Overweight rating and price target of $55.

High Quality

“As a high quality growth industrial, Fortive likely will match the investment style of the vast majority of current Danaher PMs and so we see a relatively smooth launch into the public market,” the analyst mentioned.

Pointing to Fortive’s “surprisingly high quality portfolio, Coe stated that with 2–3 percent organic growth, operating margins of 20–21 percent and free cash conversion of more than 100 percent, the portfolio consisted of above average quality, market leading businesses in mostly niche markets that have high barriers to entry.

Danaher Redux

“The similarity with Danaher circa 2003 is eerie, with 70–75 percent of its then core portfolio comprising current FTV businesses with a very similar revenue base,” Coe noted.

Over the subsequent 13 years, Danaher was able to compound revenues at 12 percent per annum, cumulatively outperforming the S&P 500 by 350 bps.

Although Fortive might not be able to repeat this performance, “with >$7 billion of deployable capital over 2016/20, we see an outlook for double-digit revenue growth and mid-teens EPS growth through YE20,” the analyst said.