Fortive Earnings: Software and Hardware Products Drive 9% Core Growth Despite Healthcare Headwinds

Narrow-moat-rated Fortive FTV started 2023 with a strong first quarter, as its revenue of $1,461 million came in above our $1,421 million estimate. While nothing in Fortive’s earnings release materially alters our long-term outlook, we’ve bumped our fair value estimate up to $86 from $85 due to time value of money. We continue to view the name as modestly undervalued, with the stock currently trading in 4-star territory.

Fortive posted year-over-year core revenue growth of 8.8% in the first quarter. Intelligent operating solutions grew its core revenue by 9.7% from the prior-year period, fueled by low-double-digit growth at Fluke and high-single-digit growth in facility and asset lifecycle. Precision technologies core revenue was up 13.7%, driven by over 20% growth at Tektronix and Pacific Scientific. Lastly, advanced healthcare solutions core remained roughly flat, as the segment had to contend with supply chain constraints at Fluke Health Solutions, lower elective procedure volumes in China due to COVID-19 shutdowns, as well as the winddown of its operations in Russia. Management said on the earnings call that elective procedures in China recovered to around 90% of normalized levels by the end of March. The company expanded its first-quarter adjusted core operating margin by 100 basis points year over year, from 23% to 24%.

Management raised the bottom end of its full-year guidance and now anticipates core revenue growth of 4%-5.5% (3%-5.5% previously) and adjusted EPS of $3.29-$3.40 ($3.25-$3.40 previously). While the macroeconomic environment remains uncertain, we are encouraged by Fortive’s solid first-quarter results. We also remain optimistic about the long-term outlook for the firm. Fortive has more than doubled its annual free cash flow from 2019 levels, which we believe positions it well to continue executing its compounder model and deploying capital into acquisitions.