Fortrea (FTRE)

Clinical research company Fortrea Holdings (NASDAQ:FTRE) beat Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 1.6% year on year to $651.3 million. The company’s full-year revenue guidance of $2.5 billion at the midpoint came in 0.7% above analysts’ estimates. Its non-GAAP profit of $0.02 per share was significantly above 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 $2.69 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 three years, Fortrea’s demand was weak and its revenue declined by 4.4% per year. This wasn’t a great result and suggests it’s a low quality business.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a stretched historical view may miss recent innovations or disruptive industry trends. Fortrea’s recent performance shows its demand remained suppressed as its revenue has declined by 5.6% annually over the last two years.

This quarter, Fortrea’s revenue fell by 1.6% year on year to $651.3 million but beat Wall Street’s estimates by 7.1%.

Looking ahead, sell-side analysts expect revenue to decline by 7.3% over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and indicates its products and services will face some demand challenges.

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 2.4% over the last four 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.

Looking at the trend in its profitability, Fortrea’s operating margin decreased by 27.9 percentage points over the last four years. This performance was caused by more recent speed bumps as the company’s margin fell by 31.2 percentage points on a two-year basis. We’re disappointed in these results because it shows its expenses were rising and it couldn’t pass those costs onto its customers.

This quarter, Fortrea generated a negative 79.9% operating margin. The company's consistent lack of profits raise a flag.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Fortrea, its EPS declined by 45.7% annually over the last three 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 Q1, Fortrea reported EPS at $0.02, up from negative $0.05 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Fortrea’s full-year EPS of $0.41 to grow 27.3%.

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 four years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.2%, subpar for a healthcare business.

Taking a step back, an encouraging sign is that Fortrea’s margin expanded by 4.2 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Fortrea burned through $127.1 million of cash in Q1, equivalent to a negative 19.5% margin. The company’s cash burn increased from $34.9 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

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 6%, 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.

Fortrea reported $101.6 million of cash and $1.29 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 $381.1 million of EBITDA over the last 12 months, we view Fortrea’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $67.2 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 were impressed by how significantly Fortrea blew past analysts’ EPS expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this quarter featured some important positives. Still, news of the CEO stepping down dominated, and shares traded down 2.4% to $6.01 immediately after reporting.

Updated: July 10, 2025 at 12:14 AM EDT

Are you wondering whether to buy Fortrea or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

We see the value of companies making people healthier, but in the case of Fortrea, we’re out. To begin with, its revenue has declined over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its rising cash profitability gives it more optionality, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, 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 9.8x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $6.84 on the company (compared to the current share price of $5.01).

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.