|Shares Out. (in M):||94||P/E||0.0x||0.0x|
|Market Cap (in M):||4,096||P/FCF||0.0x||0.0x|
|Net Debt (in M):||0||EBIT||0||0|
Summary Thesis: Colfax Corporation (Colfax or CFX) is a diversified industrial companies with a strong and sustainable market positioning operating in high growth end markets and regions. It is pursuing the successful business model pioneered by the likes of Danaher and Roper whereby the management is focusing on building, both organically and through acquisitions, a portfolio of highly differentiated products with superior brands and technologies targeting large high growth markets in which performance and quality matter. Through continuous investment in developing internal talent and relentlessly focused on streamlining operations and improving efficiency, the company plans to generate very high EPS growth 25-30% CAGR over the next 3+ years. The guidance seems achievable and it is predicated mainly on cost savings via the integration of the recent transformational Charter acquisition. The multiples are in line with comparable companies, despite the higher growth. Overall we believe this company can generate 20-25% CAGR of total investment returns over the next 2-3 years and it is therefore recommended for purchase.
Colfax was formed in 1995 and has completed a number of acquisitions and divestitures to strategically focus the business. The most recent transaction of Charter International (January 2012) roughly quadrupled the company’s revenue base and is consistent with Colfax’s plan to become a large, diversified industrial company. Colfax has two reportable segments:
Furthermore, guidance seems achievable for the following reasons.
Roughly 75% of Howden’s projected sales are in the backlog, with the remaining 25% representing aftermarket/flow business. While deliveries could get pushed out if the economy further softens, we see the 4-6% organic growth forecast as reasonably attainable. Currently the book to bill ratio is 1.01
|Subject||What am I missing on CFX?|
|Entry||03/08/2013 06:04 PM|
I feel like I’m missing the big picture bull case here. Of course the same could be said for a lot of stocks I’m looking at, like CRM.
Colfax missed on the top line in 4Q, sales declined on an organic basis, analysts’ cut earnings estimates 7% for this year and 9% for 2014 in the last 90 days, and the company missed on 4Q earnings with 33c of earnings (excluding the unexpected tax benefit) versus a 39c estimate. And after a short lived drop, the stock is hitting all time highs. I am being sincere when I ask: what am I missing?
In more detail, Colfax’s organic sales declined 2.5% y/y in 4Q and came in below consensus revenue in both of the last two quarters. Orders were up 1.9%y/y in 4Q, but a deceleration from +3.1% for the 9mos ended Sept12. Business has clearly slowed. What in the big picture is going to change this year so orders/sales reaccelerate in the next couple years to hit your/management’s growth targets?
Also, ESAB declined in 4Q by 2% organically; what is the basis for a pick up to 0-2% or ITW’s 4-6% in 2013?
I was also hoping you could help me understand the margin expansion. You wrote "Longer term, management sees Fluid Handling margins reaching 20%+ (currently mid teens), Howden margins expanding to mid teens (currently low teens), and ESAB margins moving to low teens (currently high single digits)." I was wondering, what margins do competitors earn? And/or is there something else to support the businesses earning these margins besides management's forecast?
You wrote that margins were high and so were ROIC. Over what time period were you looking at? 2007 looks like the only strong year I see. Over a longer period I see a business with negative retained earnings since at least 2006 when they were -$142M. Retained earnings today are negative $139M. The company has paid no dividends and shares outstanding went up almost 5x from 22m in 2006 to 107m fully diluted today. Maybe I’m missing something but what I see is that ROIC/ROA has been volatile and low; the return on assets in the last 7 cumulative years was negative. I know this business has changed a lot in the past few years, but when did it have high ROIC over a full cycle and why is this going to be a good business in the future?
Shares outstanding as of 12/31/2012 are indeed 94m as you show, but what about options and the convertible preferred stock? The company has preferred that is convertible into 12.2m shares. And there are 2.2m options outstanding with a $25 average strike price. There are .5m unvested RSUs you could add too. You show in the write up that the company has zero cash or debt. At 12/31/12 there was $482m of cash and $1,729 of debt for net debt of $1.2B. The company has unfunded pension and other retirement benefits of $413m. Using the price in your write-up I show an EV of about $6.2B including the underfunded pension/retirement benefits.
Can you expand more on valuation? Which comps are at 10x EBITDA? What enterprise value and EBITDA are you using to arrive at a $60-65 target in 2015? Using $62.50 stock price, the existing capital structure (this is quite generous for a company that has expanded share count by five-fold in a few years), and the 10x multiple you cite results in EBITDA of about $835m ($800m excluding the underfunded pension from debt). The consensus EBITDA is $723m in 2015. If EBITDA goes to $835 in 2015 as your numbers imply, wouldn’t that be a cyclical peak and if so, do the comps trade at 10x on cyclical peak EBITDA?
And do the comps trade at 10x on a forward basis or a trailing basis? This matters a lot for your cited ROI of 20-25%. If it is a trailing basis and assuming everything else you have written is correct, the ROI drops to 13% from your 20-25% (3 years instead of 2).
You commented on “relative stability” in 2009. The operating income of Colfax plummeted over 60% excluding asbestos expenses/income from 2007 to 2008. While in 2009 the company was much different and this was before the Charter acquisition (and many other acquisitions), Charter operating income was down over 50% in 2009.
Thanks in advance.