On Friday, Morgan Stanley (NYSE:MS) initiated coverage on Fortive Corporation (NYSE:FTV), a diversified industrial technology company, assigning an Overweight rating and an $89.00 price target on the company's shares.
The firm sees a favorable risk-reward scenario for Fortive, expecting a near-term order increase to alleviate concerns about potential negative revisions for fiscal year 2025 and to act as a catalyst for the company's valuation recovery.
According to the firm, Fortive's shares have reached an all-time low due to recent pressures on the last twelve months' cycle. Despite challenges in the Precision Technology portfolio, which accounts for approximately 30% of segment profit and has seen a decline in orders, Fortive has maintained high single-digit earnings per share growth.
This resilience is attributed to the strength of its broader portfolio, including Workforce Productive Solutions and Healthcare Consumables, which provide over 40% recurring revenue and a software mix of around 20%.
The analyst pointed out that Fortive's gross margins are among the best in class, around 60%, due in part to the high-margin nature of its recurring revenue streams. The current market valuation of Fortive, which is at roughly a 20% discount compared to the S&P 500 index, contrasts with the historical premium of about 10% that the company's shares have enjoyed since going public.
Morgan Stanley believes that the planned spin-off of the Precision Technology business will address the current undervaluation and narrow the gap with peers. The firm's sum-of-the-parts analysis suggests a $93 price, modestly above the base price target, which they consider justified.
The firm's positive outlook is further supported by industry data and competitor analysis, which indicate a ramp-up in orders for the more cyclical Precision Technology segment in the near term, contrasting with the year-to-date devaluation of the stock. This anticipated order increase is expected to drive Fortive's operational performance and stock valuation in the upcoming months.
In other recent news, Fortive Corporation has made significant strides in its business operations and strategies. The corporation has announced its intent to spin off its Precision Technologies segment into a new independent public company, NewCo, by the end of 2025.
This strategic decision is expected to streamline Fortive's operations, allowing for a sharper focus on its Intelligent Operating Solutions and Advanced Healthcare Solutions segments. The announcement was accompanied by leadership changes, with Olumide Soroye and Tami Newcombe stepping into the roles of President and CEO of Fortive and NewCo, respectively.
Fortive's Q2 revenues were reported at $1.52 billion, a 2% increase year-over-year, with earnings per share at $0.93, slightly exceeding consensus estimates. Additionally, Fortive's Advanced Sterilization Products division, in partnership with PENTAX Medical, received FDA clearance for its new ULTRA GI™ Cycle for the STERRAD™ 100NX Sterilizer with ALLClear™ Technology, a significant development in duodenoscope reprocessing.
On the analyst front, the company has received a mix of ratings. Mizuho upgraded Fortive's stock to Outperform from Neutral, while Wolfe Research revised its rating from "Outperform" to "Peer Perform." However, Fortive has sustained a Buy rating from TD Cowen and an Outperform rating from Baird, based on its strategic decisions. These are the recent developments in Fortive's business operations and strategies.
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