Fortive Spin-off (Vontier) Notes
- Recent Barron’s article notes:
- New Fortive will be focused on test and measurement equipment.
- Vontier will be focused on fuel pumps, commercial vehicle tracking products, and tools for mechanics.
- Vontier should grow at GDP+ but growth by acquisition should drive double digit free cash flow growth.
- Vontier price targets:
- Wolfe Research: $50
- Citi: $39
- Notes from Barclay’s report on Fortive/Vontier and wanted to share my notes from the report
The VNT share price implies that FTV RemainCo is being valued at 2021 P/FCF of ~21X and EV/EBITDA of ~17X (see inside; note that shareholders of FTV post-VNT spin will also own just under 20% of VNT). We think this looks low relative to the MI average, and to high quality Short Cycle Industrial peers such as ITW and ROK (leaving aside the higher valuation of ASP peers, or Software peers for Accruent and Gordian).
- Fortive (FTV) announced on September 1, 2020 its intention to separate Vontier Corporation (“Vontier”) through a spin-off of 80.1% of its current outstanding shares. Fortive will retain its remaining 19.9% stake and eventually distribute shares in a tax efficient manner. This transaction was originally announced in 2019, but it has been delayed several times, most recently due to the pandemic.
- The spin-off has $2.8BN of sales (36% of total) and will have 23% EBITDA margins. Products that the spin-off manufactures include fuel dispensers, point of sale systems, and EV charging modules. The spin-off is expected to grow at a mid-single digit rate and generate consistent free cash flow. The remaining company will retain the Fortive name and has $5.0BN of sales (64% of total). It will be focused on higher growth end markets and will have significant recurring revenue (30%+) and mid 20% EBITDA margins.
- New Fortive will include the following divisions: Field Solutions, Product Realization, Health, and Sensing Technologies. Products include test, measurement and calibration tools & solutions, portable gas detection equipment, sterilization equipment, and sensor-enabled instruments.
- When issued trading began recently under the symbol VNT-WI. It closed on 10/1/2020 at $34.00, implying a $5.8BN market cap. At this valuation, the stock is trading at 15.7x 2020 earnings and 13.2x 2020 free cash flow.
- I would expect some modest selling pressure when regular way trading begins on October 9, 2020 under the symbol VNT. I will share additional notes over the next couple of weeks.
- Good Barron’s article laying out the thesis.
- Fortive was spun out of Danaher in 2016.
- Right out of Danaher playbook (buying and spinning off businesses)
- Fortibe makes hundreds of products for dozen’s of end markets.
- New Fortive:
- Focused on professional instrumentation segments (measuring and monitoring business processes)
- Need to know if a turbine is vibrating too much? New Fortive has a solution.
- Will also be focused on data collection and analysis.
- Software sales will make up low teens.
- Fortive is trading at 29x 2021 EPS but relative is trading inline with the S&P 500 and usually it trades at a premium.
- Key to unlocking value will be Vontier spin-off:
- Will include:
- Gilbarco Veeder-Root and Orpak brands which make fuel pumps
- Telematics: Helps commercial fleet operators track vehicles
- Matco Tools business: sells tools to mechanics
- One potential knock is exposure to internal combustion engines through fuel pumps. However, Vontier has invested in electric vehicles fueling charging stations, and will continue to invest.
- Sentiment is negative for Vontier but there’s room for improvement.
- Will include:
- Best comps for New Fortive: Rockwell Automation (ROK) and Ametek (AME)
- Best comps for Vontier: Dover (DOV) and Trimble (TRMB)
- Debt will be below industry average for both companies.
- Danaher is famous for its operational efficiency and focus on continuous improvements which has resulted in excellent shareholder value creation. DHR has returned 17% a year for the past 20 years versus the S&P 500 at 5% per year.
- New Fortive and Vontier will benefit from Danaher legacy.
- Currently Fortive has margins that are 6 percentage points higher than industrial peers
- Another good Barron’s article with analysis from Wall Street Analysts