Investidea: Fortive, because the industry does not automate itself

Инвестидея: Fortive, потому что промышленность сама себя не автоматизирует

Today we have a speculative idea: take shares in industrial conglomerate Fortive (NYSE: FTV), in order to make money on industrial automation.

Growth potential and validity: 14,5% behind 14 months, taking into account the separation of company divisions into separate issuers and excluding dividends; 20,5% behind 2 of the year, taking into account the separation of the company's divisions into separate issuers and excluding dividends; 11% per year for 15 years, taking into account the division of the company's divisions into separate issuers and taking into account dividends.

Why stocks can go up: because the entire economy will be subjected to automation.

How do we act: we take shares now by 65,36 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

In 2016 Fortive became an independent company, spun off from Danaher. Fortive is now a high-tech industrial conglomerate. The company makes software, equipment and components for automation, also provides services in this area..

Инвестидея: Fortive, потому что промышленность сама себя не автоматизирует

The company has not yet uploaded a report detailing 2021 results, so sometimes we will refer to the 2020 report. The share of different industries in the revenue of each segment is calculated based on the 2020 report. All other indicators are from the 2021 report. At the end of 2021, the company's revenue was divided into three segments.

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Smart operating solutions — 41,28%. Programs, tooling, sensors and equipment for industry and construction.

Segment revenue by industry:

  1. Industry and production - 37%.
  2. Utilities and electricity supply - 11%.
  3. Government - 9%.
  4. Communications, electronics, semiconductors - 6%.
  5. Defense and aviation industry - 1%.
  6. Oil and gas sector - 12%.
  7. Retail and consumer sector — 5%.
  8. Other - 12%.
  9. Resellers - 5%.
  10. Medicine - 2%.

Segment operating margin — 18,8% from its proceeds.

Precision Technology — 35,18%. Equipment for testing industrial devices.

Segment revenue by industry:

  1. Industry and production - 20%.
  2. Utilities and electricity supply - 9%.
  3. Government - 9%.
  4. Communications, electronics, semiconductors - 10%.
  5. Defense and aviation industry - 14%.
  6. Oil and gas sector - 1%.
  7. Retail and consumer sector — 5%.
  8. Other - 15%.
  9. Resellers - 10%.
  10. Medicine - 7%.

Segment operating margin — 22,1% from its proceeds.

High-tech solutions for healthcare — 23,54%. Tools for biomaterial analysis, inventory systems, disinfectants and more.

The structure of the segment’s revenue is dominated by healthcare companies — 94%, but there is also industry and production - 2%, government - 3% and resellers 1%.

Segment operating margin — 8,2% from its proceeds.

According to the company's 2020 report, 85,37% proceeds give goods, and 14,63% - services.

Revenue by country and region:

  1. USA - 52,57%.
  2. China - 11,52%.
  3. Other, unnamed countries - 35,91%.

Инвестидея: Fortive, потому что промышленность сама себя не автоматизирует

Инвестидея: Fortive, потому что промышленность сама себя не автоматизирует

Arguments in favor of the company

Fell down. For the last 4 months, the company's shares fell sharply: with 79 to 65,36 $. So,, we can pick them up in anticipation of the rebound.

Bright future, but it is not clear to whom. U.S. industrial production is already higher than when the pandemic began, despite the fact that the number of workers in production is less than 100 thousand people, than then. All of this is made possible by investment in automation.: companies can produce more goods with less effort.

With the current situation of shortage of skilled workers and rising cost of everything, from raw materials to logistics, i would expect, that US and non-US industrial companies will continue to invest in production optimization and automation. This will be a boon for Fortive both in the short term, as well as in the long run, because automation was relevant even before the pandemic.

Benefits. There are several points, That, as i think, will attract investors into the company's shares.

Firstly, stocks are reliable. 38% the company's revenue is renewable - customers come to it more or less regularly. Expected, that this parameter will grow and the renewable revenue will be 40% already in 2022. This is very good and gives stability to the company's business..

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Secondly, advanced promotions. Nearly 12,75% revenue Fortive is software. This parameter will also increase.: Expected, that in 2022 the software will already be 16,7% revenue or even more. Software in the future can be much more marginal than physical goods, so what is it, undoubtedly, positive trend.

Thirdly, stocks are inexpensive in absolute numbers. The capitalization of the company is 23.44 billion, which will make its shares very sensitive to the influx of investors. Think, in the case of Fortive, we can expect an influx of primarily institutional investors. The company is quite promising and interesting, taking into account the economic and technological changes taking place before our eyes., but at the same time, Fortive is a profitable and serious business.

closer to the body. According to the company's 2020 report, 72,18% assets she has in the US, yet 7,1% - in Switzerland, and in no other country does she have more 5% assets. That, that the lion's share of Fortive's assets in the US, allows it to somewhat neutralize the negative consequences of rising prices for logistics and raw materials.

Conglomerate. Fortive is a collection of different successful companies, and can be expected, that over long distances it will release the most interesting units of the Vontier type into free swimming and they will show good growth rates.

And this will bring joy to the shareholders of Fortive - because we will receive a proportional number of shares of new enterprises.. Given the trend to break up large conglomerates, Fortive and its shareholders will expect the same.

What can get in the way

Not cheap in relative numbers. P / S company is not very big, but not small 4,46. P / E she has 39,72, what, frankly,, not cheap at all. So stocks can shake things up.

Over-indebted. The company has 6.947 billion dollars of debt, of which during the year it is necessary to repay 3.714 billion. She doesn't have much money.: 819,3 million on accounts plus 930.2 million debts of counterparties.

Given that, that the company spends generously on expanding and updating the business, I wouldn't expect, that its debt burden will be greatly reduced in the near future. So it's worth getting ready, that Fortive shares will scare off investors, who are afraid to invest in issuers with a relatively high level of debt.

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The company also pays a penny dividend - 28 cents per share per year, - what gives 0,43% per annum. It takes her about 17% from her profit, and I wouldn't expect, that with such debts, she will greatly increase payments, She hasn't done this since 2016..

And just like that. Problems with the cost of transportation and raw materials will somehow hit the company's business. The question here is, how long can Fortive pass these problems on to its customers.

What's the bottom line?

We take shares now by 65,36 $. Then there are three options:

  1. waiting for growth until 74 $. Think, taking into account all the positive aspects, we can wait for this level in the next 14 Months. In this scenario, we also take into account the profit from the spin-off of individual Fortive divisions into new issuers.;
  2. we wait 79 $. Here it is worth counting on a two-year wait. In this scenario, we also take into account the profit from the spin-off of individual Fortive divisions into new issuers - and here it is even more likely due to the increase in the holding period of the shares;
  3. we hold shares 15 years, while the company automates the economy to the fullest and churns out new issuers, on the growth of quotations of which we will earn.

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