Fortive's Expected Growth Is Priced In

While compounder business models can generate solid FCF growth through an array of deals, Fortive Corp’s FTV shares already reflect a lot of the prospects, Goldman Sachs’ Joe Ritchie said in a report. He initiated coverage of the company with a Neutral rating and a price target of $47.

Fortive’s EPS growth is unlikely to significantly outperform peers, “despite an EMV product cycle and potential accretion from deals (we embed $0.10-$0.15 annually),” analyst Ritchie mentioned. He added that Fortive’s shares were already trading at a 17 percent premium to the group, despite the company’s fundamentals being only marginally above average.

Core Drivers Of Growth

Ritchie enumerated three core drivers for Fortive’s growth:

1. EMV: Although this is a tailwind, there are some roadblocks. "Our detailed TAM analysis for EMV supports a ~$1bn opportunity, implying FTV’s $500mn+ share appears reasonable. However, implementation could be slow, consistent with indoor adoption,” the analyst wrote.
2. Core margins: Fortive has healthy margins and is likely to generate only gradual expansion, since input costs are rising and the company has “an uneven track record” of margin expansion.
3. Deals: These could provide upside, albeit marginal. The consensus estimates already reflect $0.10-$0.15 in year 1 accretion. There is also limited upside to the $1 billion deployment target, given the company’s current balance sheet leverage.

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