September 28, 2020 BARRON’S 17
acting like it will. Since the spin was
announced on Jan. 15, the stock has lost
6%, compared to Danaher’s gain of
29%, and the S&P 500 index’s 0.3%.
That may suggest that investors are
waiting to see how the separate pieces
trade, and creating an opportunity to
buy Fortive ahead of the spin, and get
two great companies once it’s done.
Fortive, which makes hundreds of
products for dozens of end markets,
isn’t a household name. But consumers
pump gas from pumps made by Fortive
brands, tractor-trailers have telematics
from Fortive units sending data to
headquarters, and electricians can buy
voltage meters made by Fortive at the
hardware store. It’s a high-quality in-
dustrial that helps measure and control
critical industrial processes.
New Fortive will be more focused
after it completes the split. Fortive will
be left with professional instrumenta-
tion segments focused on measuring
and monitoring business processes.
Need to know if a turbine is vibrating
too much? Fortive has a solution. Data
collection and analysis will become a
larger portion of the instrumentation
business. Software sales will make up a
“low-teens percentage” of new sales,
which means Fortive will have a solid
base of recurring sales that can trans-
late into better-than-average multiples.
Fortive isn’t that cheap. In its cur-
rent form, the stock trades for about 29
times 2021 earnings estimates of $3.
a share, a small discount to its histori-
cal average. That might seem fair, but
the price/earnings ratio for the S&P
500 is higher than it has been histori-
cally. As a result, Fortive is trading on
par with the market, despite a histori-
cal 20% premium. Fortive’s peer group
is trading at a 20% premium to its his-
torical average. In short, the market is
down on Fortive. That could change
once the spin is completed.
Vontier is key to unlocking value. It
will include Fortive’s Gilbarco Veeder-
Root and Orpak Systems divisions,
which make fuel pumps. It will take
the telematics, which helps commercial
fleet operators track vehicles, and the
Matco Tools business, which sells tools
to mechanics. In other words, the new
company is all about transportation.
Given the shift toward electric vehi-
cles, that might not seem like the best
place to be, but RBC Capital Markets
analyst Deane Dray disagrees. “The
cursory, and incorrect, assumption is
the Veeder-Root business is biased to
internal-combustion engines,” says
Dray. “This will be a well run busi-
ness.” And, he points out, the Vontier
portfolio will change over time.
Vontier knows the internal-combus-
tion business might be a melting ice
cube. It’s investing in fast-charging EV
technology and software to manage
electricity at next-generation fueling
stations.While it’s easy to slap a low
multiple on Vontier and be done with
it, Morgan Stanley analyst Joshua
Pokrzywinski argues that the spin may
mean investors put a higher multiple
on the stock. “Now that investors are
forced to have an opinion on Vontier
again, he says, “There’s substantial
room for sentiment to improve.”
If he’s correct, investors will walk
away with two companies that could be
worth more than Fortive was before
the split. Vontier’s peer group, which
includes Dover (DOV) and Trimble
(TRMB), trades for roughly 20 times
estimated 2021 earnings. Fortive’s new
peer group will include Rockwell Au-
tomation (ROK) and Ametek (AME).
That group trades for about 29 times
2021 estimated earnings. That implies a
15% to 20% bump in the stock price.
Pokrzywinski goes even further: “In-
vestors are essentially getting Vontier
for free.” He has an Overweight rating
on Fortive, with an $83 price target.
Often, it makes sense to take the
money and run once a split occurs.
That isn’t the case with Fortive and
Vontier. Debt at both companies will be
below average when the spin is com-
pleted. And the companies practice the
Danaher Business System, which fo-
cuses on ensuring that companies are
as lean and efficient as possible.
Danaher’s lean techniques focus on
continuous improvement applied to
all aspects of a business, harkening
back to W. Edwards Deming and the
post-World War II Japanese manufac-
turing philosophy of Kaizen. It deliv-
ers results: Fortive margins are six
percentage points higher than the
average S&P 500 industrial firm. Da-
naher stock has returned 17% a year
on average for 20 years, far better
than the 6% and 7% respective aver-
age annual returns of the S&P and
Dow Jones Industrial Average.
This year has been tough for Fortive.
Earnings are set to dip in 2020, hitting
$3.21 a share. But that’s not unex-
pected, given the pandemic. Earnings
could hit $3.68 a share in 2021, up 6%
from 2019 levels. What’s more, man-
agement just guided third-quarter sales
above where Wall Street was modeling.
That should make both Fortive and
Vontier appealing down the road.
“Management skill is what matters in
multi-industry land,” says Dray. “You
are making an oversize bet on a man-
agement team to generate growth
across a diversified portfolio.”B
An Industrial Tech’s
Spinoff Playbook
Danaher set Fortive free. Now Fortive is spinning off a collection of
transportation assets, unlocking value at both companies.
“Management
skill is what
matters in
multi-
industry
land.”
Deane Dray,
analyst at RBC
Capital Markets
B
reaking up, despite what
the song says, isn’t always
hard to do. Sometimes it’s
just what’s needed to get
out of a rut.
That’s the case with
Fortive (ticker: FTV), the
industrial conglomerate spun out of
Danaher (DHR) in 2016. Now, Fortive
is set for a spinoff of its own. On Oct.
9, it plans to hive off its transportation
business into a new company, Vontier
(VNT). The move is straight from Da-
naher’s playbook, which calls for buy-
ing companies and spinning them off
to generate shareholder value. Usually
it works.
Fortive stock, trading at $72, isn’t
By AL ROOT
Fortive was spun
outofDanaher,butitsstockhasfailed
to keep pace.
DHR SPX FTV
JFMAMJJAS
0
25%
Source: FactSet
Playing Catchup
2020
Illustration by Alexander Wells