Colfax to Gain From Buyouts & Divestments, Risks Remain

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We have issued an updated research report on Colfax CorporationCFX on Sep 26. This machinery stock is poised to benefit from its inorganic initiatives, solid product portfolio and cost-saving strategies. The company's earnings are projected to rise 11.3% in the next three to five years.

In the first half of 2017, the company's shares have yielded 9.6% return. However, exposure to headwinds, including forex woes, industry competition and high-debt levels, might restrict Colfax's growth momentum in the near term.

Below we briefly discuss the company's potential growth drivers and possible headwinds.

Tailwinds Boosting Colfax's Growth Opportunities

Acquisitions & Divestments: Over the past few months, Colfax has been restructuring its business portfolio through meaningful acquisitions and asset divestments. Notably, in second-quarter 2017, it acquired TBi, a leader in robotic torch technology, and HKS, a developer of advanced process analytics and sensors. These buyouts will strengthen its welding process analytics and robotic welding torches operations in the Fabrication Technology segment. Also, the company anticipates completing the acquisition of Siemens AG's Siemens Turbomachinery Equipment GmbH business in the fourth quarter. It will boost the company's Howden trading platform.

Recently, Colfax agreed to sell its Fluid Handling business to CIRCOR for proceeds of approximately $860 million. It anticipates recording material gain upon completion of the deal in the fourth quarter of 2017. The asset divestment will enable the company to focus on its core business operations.

Strategic Initiatives & Diversification Benefits: In December 2016, Colfax claimed to have realized roughly $50 million in savings from its cost-reduction programs. Also, the company anticipates realizing another $50 million from its additional cost savings strategies in 2017.

In the years ahead, Colfax seems well positioned to leverage benefits from its diversified customer base in the power generation, oil, gas and petrochemical, mining, marine and general industrial and other end markets. Furthermore, international diversity has played a major role in shaping the company's profitability over time. The company operates in the United States, Europe, Asia, the Middle East and South America.

Promising 2017 Guidance & Long-Term Targets: Colfax anticipates benefiting from its organic and inorganic growth initiatives as well as improving end-market conditions in 2017. It predicts the Gas and Fluid Handling segment to witness organic growth in the third quarter. It increased its adjusted earnings guidance to $1.65-$1.75 per share from the previous projection of $1.60-$1.75. The mid-point now stands at $1.70 versus $1.68 earlier.

Over the long run (three to five years), the company anticipates organic growth (CAGR) in the range of 1-2% above Gross Domestic Product, and segment margins to be in the mid-teens level.

Headwinds Posing Threat to Colfax's Prospects

Poor Valuation: On a P/E (TTM) basis, Colfax looks overvalued compared with the industry with respective tallies of 24x and 22.9x in the last three-month period. This makes us cautious on the stock.

Diversification Woes & Global Uncertainties: We believe that geographical diversification has exposed Colfax to risks arising from adverse movements in foreign currencies and geo-political issues. Notably, in second-quarter 2017, the company's net sales and Gas and Fluid Handling's orders declined 0.7% and 1.7%, respectively, year over year, due to adverse foreign currency translation. Moreover, as the company has to procure raw materials from suppliers both in the United States and international markets, it remains vulnerable to price fluctuations associated with policies and issues of the source countries.

Also, end markets served by Colfax are highly susceptible to global economic conditions. Lower level of industrial activities and difficult financial conditions in countries where the company operates, will adversely hurt its sales, earnings and cash flow.

Stiff Competition: Colfax faces active competition in its Gas and Fluid Handling business from both larger and smaller companies offering similar products and services, or those producing different items for same uses. Some important companies in the industry are Sun Hydraulics Corporation SNHY , Kadant Inc. KAI and EnPro Industries NPO .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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