Based on the factors that Benjamin Graham considered in analyzing potential stock picks, Fortive is not a quality investment. Only investors with a high risk tolerance and a solid investment thesis on the stock will be interested in this large-cap Farm & Heavy Construction Machinery company.
Fortive Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 6 year average earnings per share (3.17) * 6 year average book value per share (28.32) = $36.39
At today's price of $77.77 per share, Fortive is now trading 113.7% above the maximum price that Graham would have wanted to pay for the stock.
Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Positive Retained Earnings From 2015 To 2022, An Acceptable Record Of Dividends, and Decreasing Earnings Per Share
Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Fortive had positive retained earnings from 2015 to 2022 with an average of $3.47 Billion over this period.
Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.With only 9 years of available data, the Fortive cannot meet Graham's requirement of 30% growth over a 10 year period. Growth was disappointing during this period too. The average EPS during 2014 and 2015 was $2.53 based on the reported values of $2.56 and $2.50. Looking to the years 2021 and 2022, we see reported values of $0.44 and $2.10, which averages out to $1.27. This tells us that during this period Fortive's earnings per share shrank by -49.8%.
Fortive has offered a regular dividend since at least 2016. The company has returned an average dividend yield of 0.4% over the last five years.
Negative Current Asset to Liabilities Balance and Not Enough Current Assets to Cover Current Liabilities
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Fortive fails on both counts with a current ratio of 0.9 and a debt to net current asset ratio of -0.6.
According to Graham's analysis, Fortive is likely a company of low quality, which is trading far above its fair price.
| 2018-02-28 | 2019-02-28 | 2020-02-27 | 2021-02-26 | 2022-03-01 | 2023-02-28 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $5,756 | $3,800 | $4,564 | $4,634 | $5,255 | $5,826 |
| Gross Margins | 51.0% | 57.0% | 54.0% | 56.0% | 56.0% | 57.0% |
| Operating Margins | 20% | 17% | 10% | 12% | 15% | 17% |
| Net Margins | 18.0% | 77.0% | 16.0% | 35.0% | 12.0% | 13.0% |
| Net Income (MM) | $1,044 | $2,914 | $739 | $1,613 | $608 | $755 |
| Net Interest Expense (MM) | -$89 | -$77 | -$143 | -$148 | -$103 | -$98 |
| Depreciation & Amort. (MM) | -$158 | -$174 | -$342 | -$384 | -$396 | -$466 |
| Earnings Per Share | $2.48 | $6.87 | $1.65 | $4.3 | $1.58 | $2.14 |
| EPS Growth | n/a | 177.02% | -75.98% | 160.61% | -63.26% | 35.44% |
| Diluted Shares (MM) | 421 | 419 | 406 | 359 | 362 | 352 |
| Free Cash Flow (MM) | $1,288 | $1,414 | $1,346 | $1,512 | $1,011 | $1,399 |
| Capital Expenditures (MM) | -$111 | -$70 | -$74 | -$76 | -$50 | -$96 |
| Net Current Assets (MM) | -$3,756 | -$3,122 | -$6,350 | -$2,632 | -$4,434 | -$3,725 |
| Long Term Debt (MM) | $4,056 | $2,975 | $4,826 | $2,830 | $1,807 | $2,252 |
| Net Debt / EBITDA | 2.38 | 2.75 | 6.52 | 2.6 | 2.6 | 1.75 |
