Fortive's Q1 Results: A Mixed Bag, But the Spin-Off Could Be the Real Winner

Fortive Corporation (FTV) delivered its Q1 2025 earnings, revealing a tale of two companies: one thriving in recurring revenue and operational discipline, and another struggling under macroeconomic headwinds. Let’s dissect the numbers, the risks, and why investors should keep a close eye on this industrial conglomerate’s upcoming spin-off of its Precision Technologies segment.

The Good: Margin Strength and Recurring Revenue

Fortive’s Intelligent Operating Solutions (IOS) segment shined, with revenue up 2% year-over-year to $671 million and adjusted operating margins hitting a robust 33.3%—up from 31.8% in Q1 2024. This segment, which includes safety and productivity tools for industries like energy and manufacturing, is the poster child of Fortive’s “Fortive Business System” (FBS) playbook: a focus on recurring revenue streams (software and services), cost discipline, and operational rigor.

The Advanced Healthcare Solutions (AHS) division also held its ground, with 2.5% core revenue growth to $302 million. While margins dipped slightly to 23.5%, this was offset by investments in software-as-a-service (SaaS) conversions and infection-prevention products—a secular trend that should pay off long term.

The Not-So-Good: Precision Technologies’ Struggles

Precision Technologies (PT), which accounts for over a third of Fortive’s revenue, saw an 8.4% core revenue decline to $501 million. The segment’s adjusted operating margin fell to 21.8%, down from 24.4% a year ago. Management cited “delays in test and measurement investments” due to geopolitical uncertainty and trade policy headwinds. Specifically, tariffs are costing the business $190–220 million annually, a hit the company is mitigating through price hikes, supply chain reengineering, and cost cuts.

The PT segment’s pain is why Fortive’s full-year 2025 adjusted EPS guidance was cut to $3.80–$4.00 (down from prior expectations). The segment’s recovery hinges on whether its test & measurement customers—key to industries like aerospace and automotive—resume spending.

The Big Move: Ralliant Spin-Off—A Bold Bet on Focus

Fortive’s most significant move isn’t financial—it’s structural. The company plans to spin off PT into a new entity called Ralliant by late Q2 2025. This separation is a classic “separate the stars from the laggards” strategy:

• New Fortive: Will focus on high-margin, recurring-revenue businesses (IOS and AHS), with a five-year core revenue CAGR target of mid-single digits.
• Ralliant: Will target precision instruments markets like defense, space, and utilities, aiming to leverage its engineering expertise and free itself from Fortive’s operational drag.

The spin-off is critical. By splitting into two standalone companies, both can focus on their core strengths, attract specialized investors, and potentially unlock shareholder value. But execution matters: the separation requires SEC approval, IRS tax rulings, and flawless execution.

Looking Ahead: Risks and Rewards

Investors should weigh three key factors:
1. Tariff Mitigation: Can Fortive’s price hikes and supply chain moves offset the $200 million annual tariff hit? The company claims full mitigation by Q4 2025, but delays could hurt margins.
2. Spin-Off Success: If Ralliant gets off the ground smoothly, both entities could see valuation upgrades. Missteps here could spook the market.
3. PT’s Turnaround: Test & measurement demand is cyclical. A rebound in Q2/Q3 2025 could be a catalyst, but investors shouldn’t bet the farm on a quick rebound.

Conclusion: A Buy for the Spin-Off Play

Fortive’s Q1 results are a mixed bag, but the strategic clarity of the Ralliant spin-off makes this a compelling long-term bet. Here’s why:

• Margin Machine: The IOS/AHS combo boasts 25.3% adjusted operating margins and recurring revenue streams, making it a steady cash generator.
• Spin-Off Catalyst: Separating PT removes a drag and allows both entities to focus. Ralliant’s defense/space exposure is a high-growth niche, while New Fortive can emphasize software and healthcare services.
• Valuation Upside: Fortive’s shares trade at 15.8x forward P/E, below its five-year average. A successful spin-off could narrow that gap.

The risks—tariffs, PT’s recovery timeline, and execution—remain significant. But for investors willing to look past near-term PT headwinds, Fortive’s structural shift could be a home run. Buy with a long view, and keep an eye on Ralliant’s June 2025 investor day for clarity on standalone strategies.

As Jim would say: “This isn’t about today’s earnings—it’s about tomorrow’s companies. Fortive’s bet on focus could pay off big.”

Final Take: Hold for the spin-off, but brace for volatility until the separation is done.