Fortive Initiated Neutral At JPMorgan, Says Current Valuation Prices In Growth

Although Fortive Corp FTV has solid franchises, the current premium valuation of its stock already reflects the attractive opportunities, while not baking in the risks associated with core cyclicality, JPMorgan’s Stephen C. Tusa said in a report. He initiated coverage of the company with a Neutral rating and a price target of $48.

Fortive has strong, high quality franchises, and has plans of evolving via aggressive acquisition activity over the next 3 years. Moreover, EMV is an attractive opportunity, with good software-related offerings.

High Cyclicality

Analyst Stephen Tusa pointed out that the outlook of low-single-digit organic growth was not better than the group, while the portfolio is “at least as cyclical as last cycle, and maybe more so.”

Although Fortive’s margins are approaching 20 percent, which are among best in class, there is still runway especially at Transport, “as upfront EMV investments give way to increased revenue, while software/SaaS mix grows,” Tusa stated. He expects the company to generate average organic profit growth of ~5 percent over the next three years.

Comparing With DHR

Many investors believe Fortive’s cyclicality is similar to what Danaher Corporation DHR experienced in 2003-2004, given a similar revenue base, some business overlap, and continued solid free cash flow. “This is all valid, but we also see higher leverage, higher margins, and cycle timing dynamics that make this more like ’00/’01, suggesting more risk than generally perceived,” the analyst commented.

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