Fortrea (FTRE)

Clinical research company Fortrea Holdings (NASDAQ:FTRE) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 3.9% year on year to $701.3 million. The company’s full-year revenue guidance of $2.73 billion at the midpoint came in 3.1% above analysts’ estimates. Its non-GAAP profit of $0.12 per share was 25.7% 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 $2.76 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.

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last four years, Fortrea’s demand was weak and its revenue declined by 2.6% per year. This wasn’t a great result and is a sign of poor business quality.

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 2.4% over the last two years align with its four-year trend, suggesting its demand has consistently shrunk.

This quarter, Fortrea reported modest year-on-year revenue growth of 3.9% but beat Wall Street’s estimates by 8.2%.

Looking ahead, sell-side analysts expect revenue to decline by 6.2% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and suggests its products and services will face some demand challenges.

Fortrea’s high expenses have contributed to an average operating margin of negative 4.6% 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 45.4 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 37.3 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.

Fortrea’s operating margin was negative 1.2% this quarter. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Fortrea, its EPS declined by 35.6% annually over the last four years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

In Q3, Fortrea reported adjusted EPS of $0.12, down from $0.23 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Fortrea’s full-year EPS of $0.52 to grow 29.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and 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 3.5%, subpar for a healthcare business.

Taking a step back, we can see that Fortrea’s margin dropped by 6.3 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 a big investment cycle.

Fortrea’s free cash flow clocked in at $79.5 million in Q3, equivalent to a 11.3% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Fortrea’s five-year average ROIC was negative 11.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Fortrea’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Fortrea’s $1.19 billion of debt exceeds the $131.3 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $191.9 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Fortrea could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Fortrea can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We were impressed by how significantly Fortrea blew past analysts’ revenue expectations this quarter. We were also glad its full-year revenue guidance trumped Wall Street’s estimates. On the other hand, its EPS missed. Overall, we think this was a decent quarter with some key metrics above expectations. The stock remained flat at $9.70 immediately following the results.

Updated: December 3, 2025 at 11:17 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Fortrea, you should also grasp the company’s longer-term business quality and valuation.

Fortrea falls short of our quality standards. To kick things off, its revenue has declined over the last four years, and analysts don’t see anything changing over the next 12 months. 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 19.3x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $11.21 on the company (compared to the current share price of $14.62), implying they don’t see much short-term potential in Fortrea.