Fortrea stock target reduced, keeps Outperform on Q3 earnings

On Monday, Baird maintained an Outperform rating on Fortrea (NASDAQ:FTRE) shares while reducing the price target to $28.00 from the previous $30.00. The adjustment follows Fortrea's stock price experiencing a significant surge, approximately 40%, after their third-quarter earnings report, only to relinquish most of those gains subsequently.

The analyst observed that despite several metrics remaining poor or at sector lows, Fortrea is on track with its final TSA transition in the first half of 2025. Improvements in client relationships, service, and execution were also noted.

The fourth-quarter pipeline for Fortrea is reported to be more robust than the average of the previous three quarters. This mirrors the third quarter, where Fortrea achieved an industry-leading 1.23x new business bookings (NBB).

The firm anticipates that Fortrea will see a resumption of revenue growth due to easy comparisons to previous performance and unique company-specific factors. These factors are expected to contribute to significant cost leverage and a substantial reduction in interest expenses, which in turn should lead to exceptional earnings per share (EPS) growth.

However, it is important to note the expectation of a notably lower EBITDA margin for the first quarter of 2025 compared to the fourth quarter of 2024. This forecasted dip is attributed to typical seasonal variations, increased bonus accruals, and the impact of recent spin-offs.

In other recent news, Fortrea announced mixed results in its Q3 earnings call, with a 5.4% decrease in year-over-year revenue to $674.9 million, but a strong book-to-bill ratio of 1.23 and a 6.2% growth in backlog to $7.6 billion.

Despite the drop in revenue, the company's adjusted net income rose by 3% to $20.7 million and liquidity remained robust, surpassing $0.5 billion. TD Cowen has maintained a Hold rating on Fortrea, but increased the stock's price target from $23 to $25 following these results, indicating a positive outlook on the company's future business opportunities.

Fortrea is experiencing margin growth due to cost and productivity optimizations, which TD Cowen sees as a positive step for the company's strategic plans. The company's consistent performance and its ability to meet its targets, such as maintaining a book-to-bill ratio of 1.2 or higher, are considered crucial for improving market confidence in Fortrea's long-term prospects.

These recent developments show Fortrea's commitment to strategic investments and operational improvements, with a focus on leveraging AI and ML technologies to enhance operational efficiency. The company aims to maintain a book-to-bill ratio of 1.2 in the second half of 2024 and has updated its revenue guidance for 2024 to between $2.7 billion and $2.725 billion.

InvestingPro Insights

Recent InvestingPro data provides additional context to Baird's analysis of Fortrea (NASDAQ:FTRE). The company's market capitalization stands at $1.77 billion, reflecting its current market position. Despite Baird's optimistic Outperform rating, InvestingPro data shows that Fortrea has not been profitable over the last twelve months, with a negative P/E ratio of -8.86. This aligns with the analyst's observation of poor metrics in certain areas.

However, there are signs of potential improvement. An InvestingPro Tip suggests that net income is expected to grow this year, which could support Baird's prediction of exceptional EPS growth. Additionally, the company's price-to-book ratio of 1.17 indicates that the stock might be reasonably valued relative to its book value.

The recent stock performance data from InvestingPro corroborates the volatility mentioned in the article. While Fortrea has seen a strong 13.85% return over the last month, its year-to-date return stands at -43.47%, illustrating the significant fluctuations in its stock price.

For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Fortrea, providing a deeper understanding of the company's financial health and market position.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.