This high-margin industrial company operates in a niche market that’s going places thanks to the digital revolution.

Fortive Corporation ( FTV 0.89%) is far from being a household name, but that shouldn’t deter investors from looking at this engineered products company more closely. There’s a lot to like, and it seems a good value for long-term investors.

In fact, Wall Street’s consensus price target for this large-cap growth stock stands at $74.29, implying nearly 18% upside potential to its current price. Let’s see why. Introducing Fortive

Having said it’s not a household name, it’s probably a good idea to introduce the company. Fortive operates three segments. The largest, with $237 million in operating profit in the first half of 2022, is intelligent operating solutions. The segment also offers instrumentation, sensors, software, and services to help customers with their everyday workflow environment. Its primary business is Fluke Corporation, a professional electronic test tools and software provider sold across a range of industrial sectors.

The second segment, precision technologies, generated $217 million in profit in the first half. The segment provides instrumentation and sensing technologies to customers developing and manufacturing products and solutions. The segment’s two most prominent businesses are Tektronix (precise test and measurement solutions for engineers) and a collection of sensing technologies businesses. Key customers include companies like ABB , GE Healthcare, Intel , Apple , and Lockheed Martin .

Finally, its advanced healthcare solutions business is responsible for $56 million in first-half profit. Its key business is advanced sterilization products or ASP (sterilization and disinfection solutions to prevent infections) in the hospital environment. Five reasons to like Fortive stock

First, Fortive’s businesses operate in niche markets and carry high margins. For example, intelligent operating solutions and precision technologies had operating margins of 18.8% and 22.1% in 2021, respectively. Surprisingly, advanced healthcare solutions is its lowest margin business by far, with just 8.2%. The high margins in the industrial-facing businesses attest to the company’s pricing power within its niche markets. Reducing the cyclicality of its business

Second, management is reducing the cyclicality of its business and increasing its profit margin by growing its recurring and software revenue. Five years ago, its share of the revenue from recurring sources was just 16%, but it stood at 38% at the end of 2021. Similarly, Fortive had minimal revenue from software in 2016, but it contributed 13% at the end of 2021.

These changes have contributed to an expansion in gross margin from 49% to 58%. Given the extra stability provided by recurring revenue (which holds up better in a downturn), Fortive should arguably command a higher valuation multiple. Excellent track record

Third, management has an excellent track record of acquisitions, having made $8 billion worth of acquisitions since 2016, the year Fortive was spun out of Danaher . Making acquisitions and applying management’s business systems to them to generate profit improvements were crucial parts of Danaher’s astonishing success story , and Fortive’s management has done the same as an independent company. Automation and digitization will drive growth

Fourth, Fortive lists “automation and digitization” as key secular drivers across all three segments. It’s an essential point, because Fortive’s solutions (test, measurement, sensing, monitoring) are all about gathering data and ensuring customers’ workflows are efficient — whether it’s detecting compressed air system leaks or cabling infrastructure, testing EV batteries in production, or preventing infections in hospitals.

Moreover, with the explosion of digitization and advanced analytics coming from the increasing adoption of internet-enabled technology, Fortive’s solutions can add even more value, not least by analyzing data to produce actionable insights for customers. This results in productivity improvements for customers. Attractive valuation

Finally, Fortive’s valuation looks attractive. Management expects $1.17 billion in free cash flow (FCF) in 2022. It’s often argued that a mature industrial company should trade at a price-to-FCF multiple of around 20. However, Fortive currently trades at 19.3 the estimated 2022 FCF, and it’s not a mature company. Management sees its FCF growing at a double-digit annual rate over the next five years. A stock to buy

Fortive looks very attractive, but anyone buying it must be aware of the near-term risk of slowing growth — the company is definitely not immune to spending conditions in the industrial sector. Fortive looks like an excellent long-term investment if you can ride out potential volatility. Should you invest $1,000 in Fortive Corporation right now?

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