Some companies have weathered the extreme volatility the market has seen so far this year incredibly well. Others, meanwhile, don’t fare so well. A company that has generated a loss greater than that of the market as a whole, even if the fundamental performance remains robust, is Fortive Corporation (NYSE: FTV). Likely due to worries about the broader economy, investors have mostly ignored the company’s strong revenue growth and cash flow expansion this year compared to the same period last year. Part of the problem may be related to the company’s stock price before and in some ways still are. Going forward, it remains to be seen what the future holds. If the first quarter of fiscal 2022 is any indication, the company’s stock could be an attractive and profitable investment. But given how little information we have about the coming months, a more appropriate rating for the company would be “hold” for now.
A disparity exists
In December last year, I wrote an article detailing whether or not Fortive would be an attractive opportunity for long-term investors. In this article, I praised the company’s ability at slowly reinventing itself in recent years. I acknowledged the company’s attractive revenue and bottom line performance and indicated that the company’s long-term outlook would likely be positive. However, I also said that stocks are rather expensive. Due to the high share price, I ended up giving the company a “retention,” indicating my belief that its returns would likely match, more or less, what the broader market realizes in the future. . Since that article was published, stocks have plunged 23.9%. While that sounds painful, it’s worth noting that the market is down 17.4% over the same period. All things considered, this drop for Fortive is not horrible.
Surprisingly, this drop in Fortive’s price came even as the company’s fundamental performance remains strong. When I last wrote about the company, we only had data covering the third quarter of the company’s fiscal 2021. Today, that date now extends to the first quarter of this year. To begin with, however, we should cover the end of the business Last year. According to management, revenue was $5.26 billion. This translates to a 13.4% increase from the $4.63 billion the company announced at the same time a year earlier. For the last quarter alone, the year-over-year revenue increase was 4%. Despite this apparent slowdown in sales towards the end of last year, the company’s profitability has been strong. Net income of $573.9 million is down from the $1.54 billion generated in 2020. However, the company’s net income has never really been a big measure of its success. Instead, we should pay more attention to cash flow numbers. Doing so, we would see that the company had a slightly better year last year than the year before, with operating cash flow up 1.6%. Meanwhile, EBITDA increased 30.4% from $986 million in 2020 to $1.27 billion in 2021.
Business growth continued to be strong at the start of fiscal 2022. Revenues in the last trimestre is $1.38 billion. That’s 9.4% above the $1.26 billion generated in the first quarter of 2021. The real improvement, however, came from the company’s bottom line. Net income of $165.1 million last quarter eclipsed the $92.9 million made a year earlier. During this same period, operating cash flow increased from $152 million to $214.8 million. While not as strong, EBITDA has also done well, growing from $311.2 million in 2021 to $350 million this year.
Unfortunately, management has not really provided guidance for the current exercise. However, if we analyze the results recorded so far in 2022, we should expect operating cash flow of around $1.40 billion and EBITDA of around $1.45 billion. By taking this data, we can very easily evaluate the company. For example, using the 2022 estimates I provided, the business is trading at a price to operating cash flow multiple of 13.8. Meanwhile, the company’s EV/EBITDA multiple is expected to reach 15.5. These figures, at first glance, seem quite attractive. They are definitely tiptoeing into valuable territory. However, that picture changes when we look at the 2021 results. In this case, the price/operating cash flow multiple is 19.5, while the EV/EBITDA multiple is expected to be 17.4. And if we go back even a year in 2020, these multiples would reach 19.8 and 22.8 respectively.
To put the price of the company into perspective, I decided to compare it to five similar companies. These are the same five companies I compared it to in my last article. On a price/earnings basis, these companies range from a low of 7.4 to a high of 52.2. Using our 2021 results, we can see that the company is more expensive than three out of five companies. Meanwhile, using the EV to EBITDA approach, the range is 3.5 to 14.1. In this case, Fortive was the most expensive of the bunch.
|Company||Price / Operating Cash||EV / EBITDA|
|Mueller Industries (MLI)||7.4||3.5|
|Crane Holdings (CR)||12.7||8.6|
|Franklin Electric Co. (FELE)||52.2||14.1|
|EnPro Industries (NPO)||10.9||8.1|
The data we have today suggests that Fortive continues to grow at a good pace and generate attractive cash flow along the way. On a forward-looking basis, if my estimates for 2022 are accurate, the business could become an attractive opportunity. However, we have no assurance that this would be the case and management has not provided any detailed guidance for the current year. Using strictly 2021 data, we can see that the company is probably, at best, fairly valued. And if financial performance returns to what it was in previous years, it’s not hard to imagine the company becoming very expensive very quickly. For this reason, I have decided to rate the company as a “hold” pending a more proper understanding of what fiscal 2022 will look like. In the event that my own estimates prove accurate, shares of Fortive could offer a nice upside. But in the absence of that, I think the company is more likely than not to be a good fit.