M&A Machine To Come Out Firing From Fortive Corp

Fortive is created from the July 2016 spinoff of Danaher Corporation DHR and is the new home of Danaher's test and measurement segment of the industrial technologies unit.

However, the brokerage started coverage of the stock with a Market Perform rating and $46 price target,as it remains concerned that organic results will be challenged to meet GDP+ expectations.

"We believe that the general view of 'GDP +' normalized organic revenue growth could prove challenging as manufacturing as a percentage of GDP has been structurally declining for decades — making it increasingly more difficult to outperform a benchmark made up of faster growing industries including professional services, healthcare, and real estate," analyst Joseph Giordano wrote in a note.

Related Link: Fortive Gets Positive Opinion From Morgan Stanley Into IPO

Expectations And Estimates

Giordano estimates that FTV major end-markets' contribution to U.S. GDP has declined over 400 bps over the past 15 years and about 100 bps over the past 10 years, "making the hurdle incrementally higher with each passing year."

As such, the analyst expects average organic revenue growth below 3 percent through 2020 and beyond. This translates into about 4 percent 2020 earnings CAGR assuming about 30 percent incremental margins on the total business.

Giordano sees EPS of $2.28 for 2016 and $2.35 for 2017. Street expects earnings of $2.42 a share for 2016 and $2.55 a share for 2017.

Since initial market expectations likely provide little room for error, the analyst sees normalized margin expansion below management's expectation due to his lower revenue targets, translating into a low single digit organic earnings CAGR.

Possible M&A Plotline

Despite strong brands and a powerful M&A story should provide support, Giordano said "there are other similar operating structures that have, in our opinion, better organic profiles based on end-market exposure."

The analyst's top picks in the sector include Outperform-rated Roper Technologies Inc ROP, Colfax Corp CFX and Cognex Corporation CGNX.

Shares of Fortiv closed Friday's regular trading session at $49.54.