It has been about a month since the las t earnings report for Colfax (CFX). Shares have added about 8.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Colfax due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recen t earnings report in order to get a better handle on the important drivers.
Colfax Q4 Earnings Top Estimates on Solid Sales & Margin
Colfax kept its earnings streak alive in the fourth quarter of 2018, with earnings surpassing estimates by 9.5%. This was the 13th consecutive quarter of impressive results.
This machinery company's adjusted earnings in the reported quarter were 69 cents per share, above the Zacks Consensus Estimate of 63 cents. Moreover, the bottom line increased 53.3% from the year-ago tally of 45 cents, primarily on the back of sales growth, margin improvement and a lower tax rate.
In 2018, Colfax's adjusted earnings were $2.31 per share, surpassing the Zacks Consensus Estimate of $2.25. It was approximately 32.6% above the year-ago tally of $1.74. Buyout and Existing Businesses Drive Revenues
In the quarter under review, Colfax's net sales were $985.2 million, reflecting growth of 12.7% from the year-ago quarter. The improvement was driven by 10.6% growth in existing businesses and 6.9% benefit from acquired assets, partially offset by adverse impact of 4.8% from foreign currency movements.
Further, the top line surpassed the Zacks Consensus Estimate of $978.2 million by 0.7%.
The company reports net sales under two segments - Air and Gas Handling, and Fabrication Technology. The segmental information is briefly discussed below:
Revenues from the Air and Gas Handling segment were $410.3 million, increasing 9.7% year over year. Results were driven by 2.4% gain from acquired assets and 10.6% growth in existing businesses, partially offset by 3.3% adverse impact of unfavorable movements in foreign currency translations.
This segment's orders were worth $411.8 million in the reported quarter, reflecting year-over-year growth of 11.8%. The improvement was driven by rise in mining and industrial orders. Backlog at the end of 2018 was $832.2 million, down 6.9% year over year.
Revenues from Fabrication Technology totaled $574.9 million, increasing 14.9% year over year on the back of healthy demand in end markets served, solid product portfolio and favorable pricing.
It is worth mentioning here that favorable pricing had a positive 5.4% impact on sales growth while acquisitions and volumes added 10.3% and 5.1%, respectively. This was partially offset by 5.9% negative impact of foreign currency translations.
In 2018, the company's net sales were $3,666.8 million, reflecting growth of 11.1% from the year-ago figure. Also, results were in line with the Zacks Consensus Estimate of $3.66 billion. Margins Improve Y/Y
In the quarter under review, Colfax's cost of sales increased 12.4% year over year to $681.4 million. It represented 69.2% of net sales compared with 69.4% in the year-ago quarter. Gross margin increased 20 basis points (bps) year over year to 30.8% on the back of synergistic gains from acquired assets and gains from restructuring actions. Selling, general and administrative expenses increased 9.7% year over year to $218.1 million. It represented 22.1% of net sales.
Adjusted operating income in the quarter under review increased 34.1% year over year to $92.4 million. Also, adjusted operating margin grew 150 bps to 9.4%. Effective tax rate was 16.8% versus 20.1% in the year-ago quarter. Balance Sheet and Cash Flow
Exiting the fourth quarter, Colfax had cash and cash equivalents of $245 million, roughly 14.3% below $285.9 million at the end of the las t report
ed quarter. Long-term debt balance increased 5% sequentially to $1,192.4 million.
In 2018, the company generated net cash of $226.4 million from operating activities, reflecting 3.5% growth from the previous year. Capital used for purchasing property, plant and equipment totaled $69.6 million, reflecting year-over-year growth of 1.3%.
During the year, the company used $200 million for repurchasing shares. Outlook
For 2019, Colfax anticipates orders for the Air & Gas Handling platform to increase 3-7% year over year - including the impact of mid to high-single-digit core growth, low-single-digit benefit from acquired assets and a low-single-digit adverse impact of forex issues. End markets are predicted to improve during the year.
In addition, total sales are likely to be between 1% decline and 1% growth. Core sales growth will be roughly flat while acquisition benefits will be in a low-single digit and adverse impact of forex issues will be in a low-single digit. Adjusted operating margins are likely to improve from low-9% to 11-12%. Benefit and costs related to restructuring activities are predicted to be $25 million and $20 million, respectively.
For the Fabrication Technology platform, the company anticipates sales growth of 7-9%. The platform's core sales are likely to grow in a mid-single digit while acquisition is likely to benefit in a mid-single digit and forex woes are expected to hurt in a low-single digit. Adjusted operating margin is likely to improve from mid-11% to 12.25-12.75% on the back of improved sales growth, restructuring measures and productivity gains. Benefit and costs related to restructuring activities are predicted to be $20 million and $25 million, respectively.
In addition, Colfax has communicated that it is on track to complete the acquisition of DJO Global Inc. in the first three months of 2019. Further, the company is looking for strategic options for its Air & Gas Handling platform.
Adjusted operating profit is anticipated to increase more than 20% in 2019 while tax rate is estimated to be in low 20s.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.41% due to these changes.
At this time, Colfax has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Colfax has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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