Analyst sees Fortive stock as undervalued in sector, highlights spin-off opportunities as catalyst

On Thursday, JPMorgan made an adjustment to its rating for Fortive Corporation (NYSE:FTV), moving it from Neutral to Overweight and increasing its price target to $92 from the previous $90. The upgrade reflects a change in perspective at the firm following an analysis of the company's financial potential and market position.

Fortive, which has experienced challenges throughout the year, is now recognized by JPMorgan for its value based on free cash flow yield. The analyst noted that Fortive's stock is one of the most affordable within its sector when considering this metric. Although the fundamentals of the company did not receive overwhelming praise, the potential for strategic portfolio actions was cited as a reason for optimism.

The analyst pointed out that parts of Fortive's product and technology segment, specifically Tektronix and the sensors business, are considered highly attractive assets. Any potential transactions involving these parts of the business are expected to act as a catalyst for the company's stock performance.

In addition to strategic moves, Fortive's plan to repurchase shares using its available free cash flow was highlighted as a low-risk capital allocation strategy. This, coupled with a revenue base that is anticipated to remain relatively stable even in economic downturns, is seen as a factor that could support a favorable risk/reward scenario for investors.

The upgrade to Overweight implies that JPMorgan sees Fortive as a stock that could outperform the average returns of the analyst's coverage universe in the foreseeable future. The new price target suggests a modest but positive adjustment in the expected value of the company's shares.

In other recent news, Fortive Corporation's Q2 revenues rose by 2% year-over-year to $1.52 billion, with earnings per share slightly exceeding consensus estimates at $0.93. The company has received a mix of ratings, with Morgan Stanley and Mizuho assigning an Overweight and an Outperform rating respectively, while Wolfe Research downgraded its rating to "Peer Perform". Fortive also sustained a Buy rating from TD Cowen and an Outperform rating from Baird.

The ratings came after Fortive announced its intent to spin off its Precision Technologies segment into a new independent public company, NewCo, by the end of 2025. The strategic decision aims to streamline Fortive's operations, allowing for a sharper focus on its Intelligent Operating Solutions and Advanced Healthcare Solutions segments.

Leadership changes are also in the pipeline, with Olumide Soroye and Tami Newcombe stepping into the roles of President and CEO of Fortive and NewCo, respectively. Additionally, Fortive's Advanced Sterilization Products division, in partnership with PENTAX Medical, received FDA clearance for its new ULTRA GI™ Cycle for the STERRAD™ 100NX Sterilizer with ALLClear™ Technology.

InvestingPro Insights

Fortive Corporation's financial metrics and market position align well with JPMorgan's upgraded outlook. According to InvestingPro data, Fortive boasts impressive gross profit margins of 59.67% for the last twelve months as of Q2 2024, indicating strong operational efficiency. This supports JPMorgan's view on the company's potential, especially considering its attractive free cash flow yield.

InvestingPro Tips highlight that Fortive operates with a moderate level of debt, which could provide flexibility for the strategic portfolio actions mentioned by JPMorgan. Additionally, analysts predict the company will be profitable this year, reinforcing the positive outlook on its financial stability.

However, investors should note that Fortive is trading at a high P/E ratio of 30.42, which may suggest the stock is already pricing in some of the optimism. This valuation metric could be important to consider alongside JPMorgan's upgraded price target.

For readers interested in a deeper analysis, InvestingPro offers 7 additional tips for Fortive, providing a more comprehensive view of the company's financial health and market position.

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