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We believe Colfax is a compelling risk/reward and exciting special situation at current levels. The previously industrial-focused company recently completed a transformational acquisition of a secular growth medical technology platform and is now in the process of divesting their most cyclical business. We believe the stock initially sold off due to confusion about the acquisition; the stock is covered by industrial focused sell-side analysts and was heavily owned by industrial focused pods at various hedge fund platforms. We sense that some teams could no longer own the stock given its “new focus” on med tech. Bottom-line: CFX is no longer a pure industrials business and they’ve just announced a deal to sell their cyclical Air & Gas (A&G) division and de-lever their balance sheet. The numbers we’re presenting assumes this sale.
Colfax has a superb owner/operator with Mitch and Steven Rales, of Danaher (ticker: DHR) fame. Colfax’s founders Steven and Mitchell Rales own 18.5% of CFX shares. The brothers are quite familiar with the medical equipment industry, as they launched Danaher Corp (trades at 20x EBITDA), a key player in medical devices, back in 1984. Further, Colfax CEO Matt Trerotola worked at Danaher before joining Colfax in 2015. In 2016, Danaher spun out Fortive (trades at 16x EBITDA), which is another successful Rales brother’s public company focused on rolling up specific industrial verticals including measurement, monitoring, and industrial products and technologies.
Colfax at $25 per share (134M FD shares outstanding) = $3.35bn market cap with net debt expected to decline to $2.1bn post the $1.8bn sale of A&G [=$5.45bn post-sale EV].
The company that was acquired, a med tech company called DJO Global, is focused on orthopedics and rehabilitation. The company will now have two divisions: Fab Tech (ESAB) and Med tech (DJO Global).
We believe that as the positive margin mix shift happens, the stock will get revalued.
Pro forma FY20E metrics: Based on our estimates for CFX detailed below, CFX trades at 7.2x EV/EBITDA vs Fab tech peers = 10-13x, med tech peers = 12x-17x.
At peer weighted avg. multiple [we expect med tech=60% of EBITDA by 2023] of 13.5x EBITDA/19.8x EPS, CFX price target estimate = $56-$57 on 2020 metrics with a $90-$94 PT on 2023 #s.
The key to our thesis is a portfolio shift towards higher-margin, less cyclical growth businesses with more attractive capital deployment opportunities. Post A&G-divestiture, CFX has 2 platforms that they believe can each generate $3-5bn of revenue within the next 5yrs+
DJO—2018: 1.2bn sales, 55% GM, 23% EBITDA margin = $276m of EBITDA—targeting 4-5% OSG, annual margin expansion towards 25%+ EBITDA (peers 25%-30%+), opportunities for accretive tuck-ins in $17bn reconstructive market.
·Steady revenue growth with secular tailwinds – ~4% CAGR over past 5 years, flat sales in 2009—secular growth tied to an increasing aging population and a growing rate of orthopedic injuries.
1.Prevention and rehabilitation (74% of sales, $4bn market growing 3-4% per year)-Market leader in bracing with a comprehensive offering of rigid and soft bracing products. Key brands are DonJoy and Aircast. DJO also has leading positions in rehabilitation product categories that include electrotherapy devices, continuous passive motion devices, traction devices, heat and cold therapy devices and treatment tables.
2.Reconstructive (26% of sales, $17bn market growing 3-4% per year)- DJO manufactures and supplies orthopedic surgical implants, with a market leading reverse should implant product that has driven double digit sales growth over the last two years. They’re also the #2 player in bone growth stimulation products.
Fab tech—2018: $2.2bn sales, 15% EBITDA margins=$334m EBITDA— GDP+ organic growth, opportunity to close 200bps margin gap v. peers, M&A opportunities in fragmented $22bn global market.
CFX’s Fab Tech business is a leading global manufacturer of welding & cutting products used in the process of cutting and combining steels, aluminum, and other metals and metal alloys (~30% equipment, 70% consumables). CFX’s leading ESAB brand is one of the top 3 global players in the $22bn fabrication technology market, which is expected to grow 3-4% per year tied to global GDP and welding customer demand for easier-to-use equipment and automation.
EPS pro forma = $2.55/$2.98 in 2020/2021 in de-leveraging case v. $2.87/$3.47 if management continues tuck-in acquisition strategy, which is what we actually expect. Bloomberg estimates are not updated for the divestiture of A&G, which is dilutive in the near term as CFX will de-lever from 5x to 3.5x.
·EPS expected to grow 15-20% per year à $4.75/share EPS in 2023- Management expects to re-deploy FCF (conversion expect to be 100%+) towards tuck-in acquisitions paying high single to low double digit EBTIDA multiples, which they can integrate into their existing distribution platforms to exceed their threshold 10% ROIC.
·Expect 2019 pro forma EBITDA of $604m to grow at 17% cagr to $1.14bn by 2023 from combination of HSD organic growth + accretive M&A.
CFX EPS projections assuming they (1) Sell A&G for $1.8bn – has been announced (2) Execute tuck-ins of med-tech businesses (as we expect) at 10x EBITDA with leverage at the high end of our 3-4x net debt/EBITDA estimated leverage target. The price target is based on the peer weighted avg. multiple (60% med-tech, 40% fab-tech, the 2023E EBITDA % mix):
CFX EPS Projections (assuming M&A)
Price target at EV/EBITDA =
Price target at P/E =
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