Fortive Still Checks A Lot Of The Popular Multi-Industrial Boxes

  • Fortive outperformed the broader industrial sector in the October quarter, as better results in software, particularly SaaS, offset weakness in short-cycle industrial businesses.
  • Those short-cycle businesses are starting to turn, though, and Fortive’s broad end-market exposure should be an asset in the coming quarters.
  • Fortive’s leverage to automation is likely underappreciated, but management will probably continue to focus on SaaS and healthcare with future M&A.
  • The company is leveraged to attractive long-term drivers, including automation, and digitalization, but the shares really don’t work for fundamentals-driven investors.

Fresh off its spin-off of Vontier (VNT), Fortive (FTV) has seen no lull in investor enthusiasm for this newly-streamlined multi-industrial. It certainly doesn’t hurt that Fortive checks a lot of the most popular boxes for institutional investors in the industrial space – not only is it more leveraged to automation than commonly appreciated (with exposure in sensors, asset tracking/monitoring, and motional control), but the company’s aggressive moves toward software (particularly SaaS) and healthcare have certainly not gone unrewarded.

I like the secular growth story Fortive offers, as I believe the company is well-placed to leverage growing automation in manufacturing and logistics, growing remote monitoring across a range of industries, and growth digitalization in industries/markets like real estate and construction. I also see a clean balance sheet that will facilitate management resuming M&A relatively quickly.

What I don’t see, though, is a lot of undervaluation. The market is happy to pay for growth now, and the Street especially loves the above-average growth and above-average margin setup for Fortive, but the shares already trade at a pretty high relative premium to other high-quality names.

Looking Back At A Relatively Good Q3

In a quarter where the average multi-industrial posted a high-single digit organic revenue decline, Fortive’s performance was still quite good on a relative basis. Just so readers understand, while the third quarter was the last quarter to include the assets that now trade as Vontier, I’m largely only going to be discussing the ongoing assets of Fortive (Professional Instrumentation).

Overall revenue was flat on an organic basis, with a 3.5% contraction in the Professional Instrumentation business that was still a little better than the sell side expected even after intra-quarter updates.

Fluke sales declined at a low-single digit rate, while Tektronix was down mid-single digits. That’s close to half of revenue right there, while software outperformed – flat overall, and with mid-single digit revenue growth driven by businesses eMaint and Censis. Medical sales were down mid-single digits, with Fortive still seeing some impact from weaker elective procedure counts and reprioritization of hospital spending away from equipment.

Overall gross margin improved 50bp and adjusted operating income rose 8%. At the segment level, Professional Instrumentation earnings rose a little less than 2% (margin up 10bp), modestly beating expectations.