Fortive Ready For The Turn

Fortive (NYSE:FTV) has done pretty well since my last update on this (relatively) new industrial conglomerate, as the shares' 13% rise more or less matches that of 3M (NYSE:MMM) and stacks up better against the likes of Dover (NYSE:DOV), Keysight (NYSE:KEYS), and Illinois Tool Works (NYSE:ITW). While some of this performance is likely a byproduct of positive coverage initiations, Fortive has managed to continue generating positive core growth and looks well placed to leverage the nascent U.S. industrial recovery.

The fundamental story at Fortive hasn't changed all that much. This is a diversified industrial conglomerate that is run along the same principles as Danaher (NYSE:DHR); principles that include continuous process improvement and responsiveness to customer needs, as well as opportunistic M&A. I believe that Fortive can generate healthy mid-single-digit revenue growth with the businesses it has, particularly given efforts to improve and grow businesses like Tektronix and Kollmorgen, and acquire at least a few percentage points more from M&A. While the shares do not look undervalued, the implied high single-digit total return isn't so bad on a relative basis and Fortive looks like one of the better names to consider in an industrial sector that offers few obvious bargains.

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Fortive Ready For The Turn

An Intelligent Deal For Raytheon

The unpredictable and highly political nature of defense and intelligence spending make it difficult for small, publicly traded defense companies to really thrive. It is not all that surprising, then, that there has been a wave of M&A in the space - not only due to the increasing significance of electronic warfare and the need for bigger companies to add technology, but also the increasing uncertainty of spending in the face of higher deficits and debts.

With all that in mind, then, it is not surprising to see Monday's announcement that Raytheon (NYSE:RTN) reached a deal to acquire Applied Signal (Nasdaq:APSG). (For background reading, check out the Mergers & Acquisitions Tutorial.)

The Scoop on the Deal 
What is a surprise is that Applied Signal's management essentially put itself on the block back in October of this year. This is surprising because the company's management had not been very warm to the idea of a sale for many years. With that change in attitude though, things moved quickly.

Raytheon, one of the largest defense companies in the world, announced that it would acquire Applied Signal for $490 million in an all-cash deal that values Applied Signal at $38 per share. That is not only a 9% premium to the stock's closing price on Friday, but also a 90% premium to where the stock traded before management publicly discussed the possibility of a sale.

All in all, this is an eminently fair deal for Applied Signal shareholders. Relative to deals like Boeing (NYSE:BA), which bought Argon ST; Northrop Grumman (NYSE:NOC), which bought Essex; and FLIR (Nasdaq:FLR), which acquired iCX Tech; if APSG goes out at more than 15 times its trailing EBITDA, it's a fair price.

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