We Like This Diversified Industrials Spin-Off

Krzysztov Smalec: We recently launched coverage of diversified industrial firm Fortive FTV with a narrow moat, exemplary stewardship, and an $86 fair value estimate.

Fortive was spun off from Danaher DHR in 2016 and largely follows its former parent’s playbook, which involves acquiring "moaty" companies, applying lean manufacturing principles to boost their operating margins, and redeploying cash flows into additional acquisitions. This model has consistently produced strong midteen returns on invested capital, both for Danaher and now Fortive. While the M&A-heavy strategy carries the risk of overpaying for acquisitions, the company has an experienced management team with an excellent track record of capital allocation and improving margins of acquired companies.

We believe that Fortive has carved a narrow moat based on customer switching costs and intangible assets. Across all its businesses, the company has a large installed base, and over 30% of its revenue is recurring. Recent acquisitions have focused on enhancing the firm’s digital capabilities, as the company seeks to leverage its large installed base of equipment and combine it with complementary software to offer customers a comprehensive package, which we believe will reinforce switching costs.

Given its narrow moat and exemplary stewardship, we believe Fortive is poised to continue compounding cash flows and creating value for shareholders for many years to come.