Two important questions to ask before you buy Fortive Corporation ( NYSE:FTV ) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, FTV is currently valued at US$23b. Today we will examine FTV’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
What is Fortive’s cash yield?
Fortive’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Fortive to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Fortive’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Fortive also generates a positive free cash flow. However, the yield of 3.1% is not sufficient to compensate for the level of risk investors are taking on. This is because Fortive’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Fortive’s yield sustainable?
Does FTV’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 29%, ramping up from its current levels of US$1.4b to US$1.8b in three years’ time. Furthermore, breaking down growth into a year on year basis, FTV is able to increase its growth rate each year, from 7.0% in the upcoming year, to 8.8% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Fortive as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Fortive to get a more holistic view of the company by looking at:
- Valuation : What is FTV worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FTV is currently mispriced by the market.
- Management Team : An experienced management team on the helm increases our confidence in the business – take a look at who sits on Fortive’s board and the CEO’s back ground .
- Other High-Performing Stocks : If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here .
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org .