Credit Suisse Equity Research Americas/United States Fortive (FTV) Organic recovery and M&A should drive a re- rating; Upgrade to Outperform
January 13, 2017
US EE/MI RESEARCH TEAM Julian Mitchell Ronnie Weiss Research Analyst Associate Analyst +1 212 325 6668 +1 212 538 6404 [email protected] [email protected]
Lee Sandquist Jason Makishi Associate Analyst Associate Analyst +1 212 325 2245 +1 212 538 8125 [email protected] [email protected]
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. FTV: Upgrade to Outperform
We upgrade FTV to Outperform from Neutral and increase our TP to $60 from $54. We think the recent underperformance in the stock has created an attractive entry point. Fortive represents an underappreciated way of playing a short-cycle industrial recovery as well as potential benefits from the incoming Administration. We see M&A activity picking up materially this year, which should act as a meaningful catalyst for the shares.
EMV push-out: In December 2016, the liability shift for US outdoor payment systems at gas stations moved from October 2017 to October 2020, which has weighed on FTV’s share price, given that its Transportation business is viewed as a key growth lever (FTV had previously guided that this upgrade cycle could add ~1% to annual organic sales growth for a few years). Since this announcement, FTV has underperformed. However, we estimate this push-out to be only a slight headwind for FTV in the next couple of years (~$0.04 of EPS over 2017/2018), and also highlight that the smoother capex cycle removes the risk of a ‘cliff’ in Transportation sales at the end of the decade. Encouragingly, key peer DOV, on January 12 (after the close) guided for 6% growth in its Wayne business for 2017, with acceleration in 2018; we forecast a ~4% CAGR for Transportation Tech. at FTV over this period.
Organic sales acceleration: FTV’s organic sales growth slowed to almost zero in 2016, and we think that 2017 / 2018 will see an acceleration in the Professional Instrumentation business (45-50% of sales) in particular. PI should benefit from a recovery in general short-cycle industrial demand, which comprises almost 50% of the segment’s sales. While many pure-play short-cycle stocks have seen substantial valuation multiple expansion in recent quarters (EE/MI: Sector Report - 2017 Outlook), FTV’s valuation multiple has stayed steady, suggesting that any organic growth acceleration will cause a re-rating in the shares.
High incremental margins: FTV enjoys some of the highest gross margins in the EE/MI sector, which will translate into very high incremental profit margins once any revenue recovery materializes (decremental margins in PI were ~45% in the 1H16). This, coupled with the restructuring activities undertaken in Q416, should mean that management’s guidance for 50bps of annual operating margin expansion is rendered quite conservative.
Potential Trump beneficiary: FTV would be one of the biggest beneficiaries from potential policy changes within our sector, given that a substantial portion of its cash is held overseas, it has a high tax rate, as well as one of the highest share of manufacturing facilities in the US. The stock, however, has lagged most peers since the Election, suggesting investors are not yet focused on these potential tailwinds.
M&A opportunities & Blue Sky Valuation: FTV has exceptional cash generation, with FCF growth of 37% in the 9M16 period. We think this allows for substantial capital deployment, which so far has been minimal since the company spun out of DHR in mid-2016. In our Blue Sky scenario, we assume FTV deploys ~ $3bn towards M&A, alongside a reacceleration in organic sales growth (Sensing, EMV, AI&S, A&S), over 2017 & 2018, driving ~25% EPS accretion by 2018. Applying a multiple of 20x P/E (where it has traded on average since its spin-off), would imply that FTV could be worth $70+.
2 The stock has lagged in recent months, which we think creates an attractive opportunity
DHR has enjoyed many years of consistent share price …However, FTV has performed in a muted fashion outperformance… since it spun off from DHR in mid-2016
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The stock has a fairly low share of ‘Buy’ ratings among FTV has been viewed by investors as one of the EE/MI the Sell-Side companies least likely to benefit from the US Election, 100% 50% which we think is incorrect 90% 45% 80% 40% 70% 35% 60% 30% 50% 25% 20% 40% 15% 30%
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3 Source: Company Data, Credit Suisse Estimates, Bloomberg Investor concerns around the EMV delay look overdone to us
In early December, the US liability shift date for outdoor gas …This has therefore hurt FTV’s share price as well as station payment systems shifted from October 2017 to certain peers in recent weeks October 2020, which led to concerns around a slowdown in customer spending on FTV’s US Transport business… 20%
15% “Demand for EMV upgrades in the US will continue to be an important and underlying driver of our results, but these upgrades are likely to be 10% deployed over a more normalized period of time…Despite the recent decision by the payment networks to push out the liability shift date, we (%) 5% still believe we're well-positioned via our Gilbarco partnership to capture what could be a significant revenue opportunity over the next 0% several years. And although FY17 will deliver lower upgrade revenue than we had originally anticipated, we nevertheless believe this will -5%
mark the beginning of a multi-year uptrend.” 1/12/2017 12/2/2016 price to Share performance
-10% - Verifone; 12/12/2016 PAY DOV FTV FELE XLI EE/MI Average
As a result of the ‘EMV push-out’, in December we …We note, however, that the affected business only revised downwards our Transportation Technology comprises ~15% of total FTV sales and the earnings impact growth forecasts for 2017 and 2018… is less than $0.05 in the near term; key peer DOV, on Jan 12th, highlighted that it expects 6% growth for its Wayne 8.0% business in 2017 with a likely acceleration in 2018 7.0% 2016 2017 2018 2019 2020 6.0% Total FTV Revenue 6211 6306 6495 6740 6998
5.0% US EMV opportunity (organic sales %) -1.0% -1.0% 1.0% 1.3% US EMV opportunity (organic sales $) -62 -63 65 84 4.0% GVR margin 17.0% 17.0% 17.0% 17.0% 3.0% US EMV EBIT Impact -11 -11 11 14 2.0%
US EMV EPS headwind due to delay in liability shift date ($0.02) ($0.02) $0.02 $0.03 Trans. Tech Organic Sales Growth Organic (%) Tech Trans. SalesGrowth 1.0% Total Company EPS $2.70 $2.90 $3.15 $3.40 % accretion / dilution -1% -1% 1% 1% 0.0% 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2017 Wayne Growth US EMV Upgrade Opp. Length of US EMV Cycle DOV Expected EMV ~6% $500m 5-6 Years Opportunity (1/12/2017): 4 Source: Company Data, Credit Suisse Estimates, Thomson Reuters Transcripts Near term Growth Drivers (1) Short cycle recovery
Professional Instrumentation represents half of total The Professional Instrumentation top-line is closely company sales; within which, short cycle industrial correlated with that of short cycle peers…
KMT Industrial 3M Industrial end markets represent ~50% of the portfolio… Organic Sales organic sales ROK Organic Global IP, % YoY US IP, % YoY Period FTV PI growth growth Sales Growth (3mma) (3mma) Mar-09 -21% -17% -12% -14% Jun-09 -29% -27% -11% -15% Sales Split Sep-09 -24% -25% -7% -11% Dec-09 -18% -15% 1% -5% Professional Mar-10 6% 5% 10% 2% Jun-10 22% 25% 11% 7% Instrumentation Sep-10 20% 39% 27% 9% 7% 48% Dec-10 23% 37% 28% 8% 6% Mar-11 14% 29% 12% 24% 7% 5% Jun-11 11% 25% 9% 14% 5% 3% Sep-11 12% 17% 7% 17% 5% 3% Dec-11 2% 10% 9% 8% 4% 3% Mar-12 1% 9% 7% 7% 4% 4% Jun-12 0% 2% 4% 7% 4% 4% Sep-12 -6% -14% 5% 5% 3% 4% Dec-12 -1% -10% 4% 2% 2% 3% Mar-13 -1% -10% 3% -2% 2% 3% Jun-13 -2% -8% 3% 4% 2% 2% Sep-13 -1% 1% 6% 3% 3% 3% Dec-13 3% 5% 6% 7% 4% 3% Mar-14 1% 6% 5% 7% 4% 3% Industrial Jun-14 -2% 7% 5% 2% 4% 4% Sep-14 -1% 6% 4% 4% 4% 5% Technologies Dec-14 1% 3% 6% 2% 3% 5% 52% Mar-15 6% -2% 3% 3% 3% 3% Jun-15 2% -3% 1% 2% 2% 1% Sep-15 1% -8% 0% -2% 2% 1% Dec-15 -7% -9% -2% -3% 1% -1% Mar-16 -6% -5% -2% -3% 1% -3% Jun-16 -5% -7% -1% -5% 2% -4% Sep-16 1% 3% -1% -4% 2% -1%
Correlations No lag w/ FTV PI 91% 68% 96% 89% 85% 1Q lag in FTV PI 85% 71% 79% 93% 76% …Therefore, as the number of incrementally …FTV’s Professional Instrumentation and short cycle negative short cycle macro data points diminish… Industrial Tech businesses should improve, in-line with
100% T&M and short cycle peers 90% Keysight Technologies* Fortive (PI)* 80% Spectris (Test & Measurement) KMT (Industrial) 70% 60% 15% MMM (Industrial) ROK 50% FTV (IT: A&S) 40%
ve data points data ve 10% - 30% 20%
% of of % 5% 10% 0% 0%
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Organic sales change, sales % change, YoY Organic
Q3 13 v Q2 v 13 Q3 13 Q4 Q4 13Q3 v 13 Q1 14Q4 v 13 Q2 14Q1 v 14 Q3 14Q2 v 14 Q4 14Q3 v 14
Q3 15 vs 15 Q3 15 Q2 vs 16 Q4 16 Q3 Q1 Q1 15vs Q4 14 Q2 15vs Q1 15 Q4 15vs Q3 15 Q1 16vs Q4 15 Q2 16vs Q1 16 Q3 16vs Q2 16 -15%
Jun-14 Jun-15 Jun-16
Mar-14 Mar-15 Mar-16
Dec-14 Sep-15 Dec-15 Sep-16 Sep-14 5 Source: Company Data, Credit Suisse Estimates, Bloomberg
Keysight Technologies* Fortive (PI)* National Instruments (Company)* Spectris (Test & Measurement) FLIR (Instruments)* 15% 10% 5% 0% -5% -10%
-15% Organic sales change, sales % change, YoY Organic
-20%
Jun-16 Jun-14 Jun-15
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Sep-15 Sep-14 Sep-16 Long term Growth Drivers (2) Exposure to Automation & IoT trends Fortive is well placed to benefit from rising automation spend in plants and the emergence of IoT within various industrial verticals…
Segment Professional Instrumentation Industrial Technologies Industrial Technologies Industrial Technologies Industrial Technologies Business Sub-segment Sensing Technologies Automation & Specialty Transportation Technologies Specific Business Gems, Anderson-Negele, Setra Kollmorgen Thomson Portescap TeletracNavman Revenue of Specific Business $m (% $380m (6%) $950m (15%) $200m (3%) of total company) Level pressure and flow sensors, Automation platforms (software & Linear bearings and guides, linear Miniature motor technologies (DC hygienic instrumentation solutions and GPS fleet management, compliance, Products hardware), linear actuators, drives, motion systems, actuators, lifting motors, magnet motors, stack motors, services, pressure acceleration and safety, and workflow management vehicle controls, motors columns, clutches & brakes linear actuators) weight-sensing devices Automated guided vehicles (factory Compliance with electronic logging, Growth Trends Industrial automation and warehouse automation), Factory automation Motion control, machine learning workforce management, safety, collaborative robots maintenance, fleet management
Date Company Comment ...while scanning mobility demand is flat to down, we are starting to see improving orders in both work 12/16/2016 HON flow solutions and in sensing. We expect to report double-digit revenue growth year-on-year, with continued strong progress in high 10/31/2016 CGNX potential markets including logistics, 3D and China
The automation businesses of Kollmorgen and Thomson grew low single-digits. This was the second consecutive quarter for positive growth at Kollmorgen, reflecting performance in high growth markets and collaborative robotics and return to growth for Thomson, which was primarily driven by strength in 10/27/2016 FTV their distribution channel and medical equipment sales growth… we're seeing growth in our automation businesses and even while our sensors businesses are not growing overall, they're growing in China...Our sensors businesses should start to come back to growth.
…And there is considerable scope for the company to grow market share in its automation and sensing businesses
25% 23% 25% 22% 21% 20% 20% 20%
15% 15% 10% 10% 10% 7%
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Market Share (% Revenue Revenue (% Size) Share Mkt / Market Market Share (% Revenue Revenue (% Share Market Size) Mkt / 0% 0% Transportation Franchise Automation & Product Realization Field Solutions Sensing Technologies Distribution Specialty Technologies
6 Source: Company Data, Credit Suisse Estimates, Thomson Reuters Transcripts As the top-line rebounds, FTV’s earnings should benefit from strong incremental margins
FTV’s gross margins are best in class….
60% 55% 50% 45% 40% 35% 30%
Gross margin, 2016margin, Gross 25% 20% 15%
10%
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…Which should set up the company for strong operating leverage once its organic sales rebound
4.0% 4.0% Q4 15 3.0% Q3 14 Q2 15 Q1 12 3.0% Q4 14 2.0% Q3 16 Q3 16 Q4 13 1.0% 2.0% Q2 15 Q1 15 Q3 15 Q2 16 Q1 14 Q3 14 Q2 14 Q4 14 Q1 15 Q1 14 0.0%
%) Q4 15 Q2 13 -8.0% -6.0% -4.0% -2.0% Q2 130.0% Q1 132.0% 4.0% 6.0% 8.0% 10.0% 1.0% Q3 13 -1.0% Q2 12 Q1 16 Q2 12 Q2 16 Q3 13 Q1 13 Q2 14 -2.0% 0.0% Q3 15 Q4 12 Q4 12 -6.0% -4.0% -2.0% 0.0% Q3 12 2.0% 4.0% 6.0% 8.0% -3.0% Q4 13 Industrial Tech Change in Operating Margin (yoy %)(yoy MarginOperating ChangeTechin Industrial -1.0% Q1 16 Q3 12 -4.0% Test and Measurement Change in Operating Margin (yoy (yoy Margin Operatingin Change Measurement and Test Q1 12 -5.0% -2.0% Test and Measurement Organic Sales Change (yoy %) Industrial Tech Organic Sales Change (yoy %)
*Red marks indicate the use of FTV data, the blue marks relate to relevant DHR historical figures
7 Source: Company Data, Credit Suisse Estimates Trump Implications (1) Repatriation & favorable policies geared towards US manufacturers would benefit FTV…
FTV holds a substantial portion of its cash overseas, FTV also has a large US manufacturing base… and it could therefore benefit if cash repatriation laws were to change 100%
100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20%
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% % of totalcash that is overseas % of Manufacturing the in US Manufacturing Facilities% of 10% 10%
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…And a large US fixed asset base. This should shield FTV from investor concerns on the impact of ‘border adjustability’
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40% Term US the Assetsin 40% -
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8 Source: Company Data, Credit Suisse Estimates Trump Implications (2) …As would a change in the US corporate tax policy
FTV has an above sector average tax rate, and above average share of Pre-Tax Profit in the US…
40.0% 100% 35.0% 90% 80% 30.0% Median=27% 70% Median=64% 25.0% 60% 20.0% 50%
15.0% 40% tax profit in the United tax United Stated profit the in
- 30%
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…Implying that any US corporate tax reform would be accretive to its earnings
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9 Source: Company Data, Credit Suisse Estimates Low balance sheet leverage and strong cash conversion should enable substantial capital deployment…
FTV is currently less levered than the majority of the …And it enjoys very strong cash flow conversion… sector… 1,400 110% 4.0x 1,200 109% 3.5x 3.0x 1,000 108%
2.5x 800 107% 2.0x 600 106%
1.5x FCF ($ in FCF mn) ($in
ND/EBITDA 2016 , ND/EBITDA 400 105% 1.0x FCF Conversion (%) 0.5x 200 104% 0.0x
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2014 2015
2016E 2017E 2018E 2019E 2020E
…Which should mean that the company is able to de- …In a similar fashion to how Danaher has performed lever at a rapid pace and put capital towards M&A… over the years
2.5x 5X
2.0x PLL Acquisition 4X 1.5x
1.0x 3X
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Net Net / Debt EBITDA -0.5x 1X DHR (X) ND EBITDA / DHR
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3Q 15 3Q 1Q 15 1Q 15 2Q 15 4Q 16 1Q 16 2Q 16 3Q
10 Source: Company Data, Credit Suisse Estimates …And this capital deployment opportunity should act as a catalyst in 2017
DHR had a long track record of successfully …While FTV’s initial acquisitions have been fairly small, integrating large acquisitions… it is clear that the high ‘return’ ambitions are consistent with Danaher’s; we expect M&A spend to pick up this 16,000 800bps year Deal Value (LHS) Medium Term Margin Expansion (RHS) 14,000 700bps
12,000 600bps
10,000 500bps Company Name Business Segment EV/Sales Multiple ROIC Target eMaint Enterprises Fluke 3.5x 10.0% 8,000 400bps GTT Transportation Tech 3.5x 10.0% 6,000 300bps
4,000 200bps
Total Announced Deal ($mn) TotalAnnounced Value Medium Term Margin Margin Medium (bps) Term Expansion 2,000 100bps
0 0bps Pall Corp* Beckman Coulter Tektronix Inc Nobel Biocare Inc Holding AG *Company guidance for margin expansion
FTV has $2-3bn of capital to deploy towards M&A and We estimate that future acquisitions are its pipeline of larger M&A targets has increased recently likely to be very earnings accretive for FTV
Multiple Paid 9.0x 10.0x 11.0x 12.0x 13.0x M&A Spend ($ Mn) 1,000 7% 6% 5% 5% 4% 1,500 10% 9% 8% 7% 6% 2,000 14% 12% 11% 10% 9% 2,500 17% 15% 13% 12% 11% 3,000 20% 18% 16% 14% 13% 3,500 24% 21% 19% 17% 15% 4,000 27% 24% 21% 19% 17%
Sensitivity based on 2017 EPS Accretion
11 Source: Company Data, Credit Suisse Estimates, Bloomberg Target price: $60; $70+ Blue Sky Scenario (Increased M&A and improved top-line)
Our target price is $60, using base case assumptions…
Price Assumptions / Comments P/E 60 22x adj. EPS (inc-amortization) EV/EBITDA 56 13.5x EBITDA DCF 59 3% growth, 22% margin, 8% WACC Core Average $58 Blended average
Value of TBA acquisitions $2 Assume $1.5bn spend @ 12X; 11X value inc. synergy
TARGET PRICE $60
…However using a more bullish growth and capital deployment scenario we could see a $70+ fair value
2018 2018 Bull 2017 2018 Revenue M&A Spend 1500 1500 PI 2,987 4,872 Acquisition Multiple 12.0x 12.0x IT 3,508 3,586 EBITDA Acquired 125 125 Total 6,495 8,458 EBITDA Margin 15% 15% Sales Acquired 833.3 833.3 Organic Growth D&A as % of sales 3% 3% PI 2.3% 5.0% D&A 25 25 IT 3.6% 5.0% Amortization 12.5 12.5 Total 3.0% 5.0% Depreciation 12.5 12.5
M&A Growth EBITA Acquired 112.5 112.5 PI 0.0% 21.7% IT 0.0% 0.0% Total 0.0% 11.5%
Total EBITA 1,484.8 1,812.2
Total Incremental Margin49.1% 23.1%
PTP 1,392.6 1,720.0
Net Income 1,006.6 1,243.2
EPS $2.90 $3.58 Accretion(%) 24%
Multiple 20.0x
Price $72
12 Source: Company Data, Credit Suisse Estimates We are not overly worried about the fate of the ‘Compounding Model’ in a higher interest rate environment Companies with compounding models (consistent M&A) …Some investors are concerned that traditional have underperformed the broader industrial universe ‘Compounders’ may perform poorly in higher interest rate over the last six months… 4% environments… 4%
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Price Price Compounding Perf Model Peers Rel. to -4%
Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16
Jan-15 Jan-12 Jan-13 Jan-14 Jan-16 Jan-17
Jul-16 Jul-16
Oct-16 Oct-16 Oct-16
Jun-16 Jun-16 Jan-17
Nov-16 Nov-16 Dec-16 Dec-16
Aug-16 Aug-16 Sep-16 Sep-16 …However, the last time we saw rising interest rates (2005-2007), these ‘Compounders’ outperformed industrial and broader indices
50% Compounding Price Perf. Vs. S&P 10 yr. US Tsy. (RHS) 5.5% 50% Compounding Price Perf. Vs. XLI 10 yr. US Tsy. (RHS) 5.5% 45% 40% 5.0% 40% 5.0% 35% 30% 30% 4.5% 4.5% 25% 20% XLI 20%
S&P S&P 500 4.0% 4.0% yr.Treausry Yield (%)
yr.Treasury Yield (%) 15% - 10% -
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0% Price Price Compounding Perf Model Peers Rel. to
Price PerfCompounding Model Peers Rel. to -10% 3.0% -5% 3.0%
Jul-05 Jul-06 Jul-07
Jul-07 Jul-05 Jul-06
Jan-05 Jan-06 Jan-07
Jan-05 Jan-06 Jan-07
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13 Source: Company Data, Credit Suisse Estimates, Bloomberg *Compounding Model Peers include: Idex, Roper, Transdigm, Ametek, Colfax FTV does not look expensive relative to its peer set
Sensing Franchise Automation Transportation Advance High ROIC Distribution & Speciality Technologies 18.9x Instrumentation Peers 20x & Soln 18x 16x 13.7x 14.5x 13.4x 12.5x 13.3x 14x 11.3x 12x 10x 8x 6x EV/EBITDA. EV/EBITDA. 2017 4x
2x
IDEX
Dover
Roper Graco
Fortive
Stanley
Ametek
Cognex
Spectris
Average Average Average Average Average Average
Snap-on
Keysight
Fleematics
Donaldson
FlirSystems
FranklinElectric
TrimbleNavigation
RockellAutomation NationalInstrument
14 Source: Company Data, Credit Suisse Estimates, Bloomberg FTV looks attractive when using CS HOLT valuation techniques
15 Source: Credit Suisse HOLT Lens Summary Financials
Income statement 2014 2015 2016E 2017E 2018E Divisional 2013 2014 2015 2016E 2017E 2018E Sales 6,337 6,179 6,211 6,306 6,495 Revenue change 6% -2% 1% 2% 3% Professional Instrumentation 2,971 3,122 2,974 2,912 2,919 2,987 Industrial Technologies 2,991 3,216 3,205 3,299 3,388 3,508 Total Revenue 5,962 6,337 6,179 6,211 6,306 6,495 Adj. EBITA 1,295 1,320 1,321 1,392 1,485 margin 20.4% 21.4% 21.3% 22.1% 22.9% YoY Revenue change Professional Instrumentation 0% 5% -5% -2% 0% 2% Industrial Technologies 6% 8% 0% 3% 3% 4% Interest (90) (92) (92) (92) Total 3% 6% -2% 1% 2% 3% Adj. PTP 1,205 1,230 1,228 1,300 1,393 GAAP EBIT margin 19.0% 19.9% 19.8% 20.6% 21.4% Professional Instrumentation 628 692 695 651 675 708 Industrial Technologies 553 597 617 649 687 744 Adj. Tax (368) (391) (361) (364) (386) Segment profit 1,181 1,289 1,312 1,300 1,362 1,452 Effective Tax Rate 30.5% 31.8% 29.4% 28.0% 27.7% Corporate (38) (43) (42) (66) (61) (60) Total Profit 1,143 1,245 1,270 1,234 1,302 1,392 Adj. Net income 837 839 867 936 1,007 margin 13.2% 13.6% 14.0% 14.8% 15.5% % margin Professional Instrumentation 21.1% 22.2% 23.4% 22.4% 23.1% 23.7% Industrial Technologies 18.5% 18.6% 19.3% 19.7% 20.3% 21.2% Adj. EPS $2.43 $2.50 $2.70 $2.90 Segment margin 19.8% 20.3% 21.2% 20.9% 21.6% 22.4% change 4% 3% 8% 8% Corporate -0.6% -0.7% -0.7% -1.1% -1.0% -0.9% Total margin 19.2% 19.7% 20.5% 19.9% 20.6% 21.4%
YoY Profit change Professional Instrumentation -2% 10% 0% -6% 4% 5% Industrial Technologies 5% 8% 3% 5% 6% 8% Total Segment Profit 1% 9% 2% -1% 5% 7%
Balance sheet 2015 2016E 2017E 2018E Cash flow 2014 2015 2016E 2017E 2018E Cash 250 1,200 2,073 2,982 Net income 837 839 867 936 1,007 Other current assets 1,599 1,612 1,636 1,682 D&A 178 177 175 181 186 Total current assets 1,849 2,812 3,709 4,664 change in working capital (22) 118 (6) (13) (26) Cash flow from operations 993 1,134 1,037 1,104 1,167 PP&E 523 557 593 630 Capex (103) (120) (124) (126) (131) Goodwill 3,949 4,000 3,909 3,816 Other cash flow from investments (161) (321) 83 0 0 Other LT assets 1,277 1,130 1,130 1,130 Cash flow from investments (264) (441) (41) (126) (131) Total LT assets 5,749 5,687 5,633 5,577
Total assets 7,598 8,500 9,341 10,240 Cash flow from financing (729) (443) (46) (105) (128)
Current liabilities 1,320 1,370 1,380 1,400 Total cash flow 250 950 873 909
LT debt 3,235 3,235 3,235 3,235 Other LT liabilities 649 680 680 680 LT liabilities 3,884 3,915 3,915 3,915 Total liabilities 5,204 5,285 5,295 5,315
Shareholders' Equity 2,393 3,215 4,047 4,925
Total liabilities and Shareholders' Equity 7,598 8,500 9,341 10,240
16 Source: Company Data, Credit Suisse Estimates Company Overview
Fortive Corporation TOTAL COMPANY Sales Split Product Group Split Sales by Destination EBIT Split Franchise Distribution RoW, 6% 10% Field Solutions Asia Pac, Industrial 24% 18% Technologies Automation & 52% Specialty Industrial 16% Technologies Professional 47% Product N America, Instrumentation Professional Realization 48% 58% Instrumentation 18% Europe, 53% Transportation 18% Technologies 26% Sensing Technologies 6% SEGMENT 2015 Professional Instrumentation Industrial Technologies Total Sales ($B) 2.9 3.2 6.1 % of sales 48% 52% 100% Operating profit ($B) 0.7 0.6 1.3 Operating margin 24% 19% 21% % of operating profit 53% 47% 100% EBITDA 0.8 0.7 1.5 % of sales 27% 22% 24%
Customers / Electronic and industrial technicians, electrical engineers, network Petroleum stations, commercial vehicle fleets, system integrators, End-market split operators, wireless carriers automotive mechanic distributors, tire and repair shops
Addressable market size ($B) 19 20 Market positioning / share 15% 16% Products sold Advanced Instrumentation & Solutions: Transportation Technologies: Field Solutions- Test tools, thermal imaging and calibration equipment for Retail/Commercial Petroleum- Monitoring and leak detection systems, fuel electrical utility and industrial applications dispensers, vapor recovery equipment, PoS payment, inventory Product Realization - Test measurement and monitoring used in design and planning/supply chain management manufacturing of electronics, industrial, or video technologies Telematics- Vehicle tracking, fleet management hardware/software Sensing Technologies: Automation & Specialty Components: Devices that sense, monitor, and control manufacturing applications such as Motors, drives and controls, commercial vehicle braking systems temperature, pressure, flow Franchise Distribution: Professional tools- tools, toolboxes, automotive diagnostic equipment Wheel Service Equipment- brake lathes, tire changers, wheel balancers
Major Brands Advanced Instrumentation & Solutions ($2.6bn): Transportation Technologies ($1.6bn): Field Solutions ($1.5bn)- Amprobe, Fluke, Fluke Biomedical, Fluke Retail/Commercial Petroleum- Angi, Doms, Gasboy, Gilbarco, Gilbarco Networks, Qualitrol Autotank , Veeder-Root Product Realization ($1.1bn) - Invetech, Keithley, Maxtek, Pacific Scientific Telematics- Navman Wireless, Teletrac Energetic Materials Company, Tektronix Automation & Specialty Components ($1bn): Sensing Technologies ($0.4bn): Dynapar, Hengstler, Jake Brake, Kollmorgen, Portescap, Thomson Anderson-Negele, Gems Sensors, Setra Franchise Distribution($0.6bn): Professional tools- Matco Wheel Service Equipment- Ammco, Bada And Coats
Competitors Keysight, Spectris, National Instruments Franklin Electric (Transportation Tech), Dover (OPW), Snap-On
Distribution 50% Direct, 50% Through Distribution (Fluke = 70%+ Distribution) ~60% Direct, 40% Through Distribution 55% Direct, 45% Through Distribution Geographic sales split, by location N America 51% 64% 58% Europe 18% 18% 18% Asia Pac 24% 12% 18% RoW 7% 6% 6%
17 Source: Company Data, Credit Suisse Estimates Companies Mentioned (Price as of 12-Jan-2017) attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings 3M (MMM.N, $177.44) were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s Allegion (ALLE.N, $66.12) Allison Transmission (ALSN.N, $33.79) coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is Ametek (AME.N, $50.44) assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between - Atkore (ATKR.N, $24.58) 5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Cognex (CGNX.OQ, $65.17) Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Colfax Corporation (CFX.N, $36.9) Cubic Corporation (CUB.N, $47.85) Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, DCI (DCI.TA, agora90.0) including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other Danaher Corporation (DHR.N, $81.29) Donaldson Company, Inc. (DCI.N, $41.9) circumstances. Dover Corporation (DOV.N, $78.37) Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company Eaton Corporation (ETN.N, $68.2) Emerson (EMR.N, $57.47) at this time. FLIR Systems (FLIR.OQ, $35.49) Fleetmatics Grp (FLTX.N^K16) Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view Fortive (FTV.N, $53.67, OUTPERFORM[V], TP $60.0) on the equity security of the company or related products. Franklin Elec (FELE.OQ, $39.4) General Electric (GE.N, $31.39) Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 Graco (GGG.N, $85.39) Honeywell International Inc. (HON.N, $117.63) months or the analyst expects significant volatility going forward. IDEX (IEX.N, $90.57) Ingersoll-Rand Plc (IR.N, $76.64) Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of Johnson Controls Inc (JCI.N, $43.79) Kennametal Inc. (KMT.N, $34.56) the sector* relative to the group’s historic fundamentals and/or valuation: Keysight Tech (KEYS.N, $36.35) Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Lennox International (LII.N, $148.51) Luxfer (LXFR.N, $11.21) Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Milacron Holdings Corp. (MCRN.N, $18.81) National Instruments Corp. (NATI.OQ, $30.93) Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. Parker Hannifin Corporation (PH.N, $143.75) Pentair Plc (PNR.N, $57.27) *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Regal Beloit (RBC.N, $71.4) Rexnord Corporation (RXN.N, $21.17) Credit Suisse's distribution of stock ratings (and banking clients) is: Rockwell Automation (ROK.N, $140.76) Roper Tech (ROP.N, $187.66) SPX (SPXC.N, $24.68) Global Ratings Distribution SPX Flow, Inc. (FLOW.N, $35.1) Snap-On (SNA.N, $177.47) Rating Versus universe (%) Of which banking clients (%) Spectris (SEPJY.PK, $16.73) Spectris (SXS.L, 2438.0p) Outperform/Buy* 45% (64% banking clients) Stanley Black & Decker, Inc. (SWK.N, $118.76) Neutral/Hold* 38% (60% banking clients) Textron (TXT.N, $49.77) Underperform/Sell* 15% (54% banking clients) TransDigm (TDG.N, $253.61) Restricted 3% Trimble (TRMB.OQ, $30.59) United Technologies Corp (UTX.N, $110.82) *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond Valmont Industries (VMI.N, $139.05) to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) VeriFone Systems, Inc. (PAY.N, $18.11) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Visa Inc. (V.N, $81.37) Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. 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For more detail please refer to FTV.N Closing Price Target Price Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html . Date (US$) (US$) Rating 30-Jun-16 49.26 51.00 N * Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to 28-Oct-16 50.21 53.00 Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: 06-Jan-17 53.87 54.00 Target Price and Rating * Asterisk signifies initiation or assumption of coverage. Valuation Methodology and Risks: (12 months) for Fortive (FTV.N)
Method: We use a blended average of a DCF (3% growth, 22% margin, 8% WACC):$59, P/E (22X Adj. EPS inc-amortization): $60, and EV/EBITDA (13.5X): $56. In addition, we assume $1.5bn in M&A spend (12X; 11X value including synergies): $2, to yield a target price of $60 and an Outperform rating. 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