Fortrea (FTRE)

Clinical research company Fortrea Holdings (NASDAQ:FTRE) missed Wall Street’s revenue expectations in Q4 CY2025, with sales falling 5.2% year on year to $660.5 million. The company’s full-year revenue guidance of $2.6 billion at the midpoint came in 4.9% below analysts’ estimates. Its non-GAAP profit of $0.09 per share was 43.8% below analysts’ consensus estimates.

Company Overview

Spun off from Labcorp in 2023 to focus exclusively on clinical research services, Fortrea (NASDAQ:FTRE) is a contract research organization that helps pharmaceutical, biotech, and medical device companies develop and bring their products to market through clinical trials and support services.

Companies specializing in drug development inputs and services play a crucial role in the pharmaceutical and biotechnology value chain. Essential support for drug discovery, preclinical testing, and manufacturing means stable demand, as pharmaceutical companies often outsource non-core functions with medium to long-term contracts. However, the business model faces high capital requirements, customer concentration, and vulnerability to shifts in biopharma R&D budgets or regulatory frameworks. Looking ahead, the industry will likely enjoy tailwinds such as increasing investment in biologics, cell and gene therapies, and advancements in precision medicine, which drive demand for sophisticated tools and services. There is a growing trend of outsourcing in drug development for nimbleness and cost efficiency, which benefits the industry. On the flip side, potential headwinds include pricing pressures as efforts to contain healthcare costs are always top of mind. An evolving regulatory backdrop could also slow innovation or client activity.

Fortrea competes with other major contract research organizations including IQVIA (NYSE:IQV), Syneos Health (private), Parexel (private), PPD (owned by Thermo Fisher Scientific, NYSE:TMO), and ICON plc (NASDAQ:ICLR).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $2.72 billion in revenue over the past 12 months, Fortrea has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Fortrea struggled to consistently generate demand over the last four years as its sales dropped at a 2.9% annual rate. This was below our standards and suggests it’s a low quality business.

Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. Fortrea’s annualized revenue declines of 2.1% over the last two years align with its four-year trend, suggesting its demand has consistently shrunk.

This quarter, Fortrea missed Wall Street’s estimates and reported a rather uninspiring 5.2% year-on-year revenue decline, generating $660.5 million of revenue.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Fortrea’s high expenses have contributed to an average operating margin of negative 4.5% over the last five years. Unprofitable healthcare companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Analyzing the trend in its profitability, Fortrea’s operating margin decreased by 35.8 percentage points over the last five years. The company’s two-year trajectory also shows it failed to get its profitability back to the peak as its margin fell by 33.2 percentage points. This performance was poor no matter how you look at it - it shows its expenses were rising and it couldn’t pass those costs onto its customers.

This quarter, Fortrea generated a negative 2.1% operating margin. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Fortrea has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.2%, subpar for a healthcare business.

Taking a step back, we can see that Fortrea’s margin dropped by 1.4 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of an investment cycle.

Fortrea’s free cash flow clocked in at $121.6 million in Q4, equivalent to a 18.4% margin. This result was good as its margin was 15.5 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Fortrea reported $174.6 million of cash and $1.12 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $189.9 million of EBITDA over the last 12 months, we view Fortrea’s 5.0× net-debt-to-EBITDA ratio as safe. We also see its $45 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its full-year revenue guidance missed and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 1.4% to $10.20 immediately after reporting.

Updated: February 26, 2026 at 6:24 AM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Fortrea doesn’t pass our quality test. To begin with, its revenue has declined over the last four years. On top of that, Fortrea’s diminishing returns show management's prior bets haven't worked out, and its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Fortrea’s P/E ratio based on the next 12 months is 13.1x. This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $16.44 on the company (compared to the current share price of $10.20).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.