We have issued an updated research report on Colfax CorporationCFX on Oct 9.
This machinery company currently carries a Zacks Rank #3 (Hold), a downward revision from its earlier Zacks Rank #2 (Buy). Its market capitalization is approximately $4.2 billion.
A few growth drivers and certain headwinds, which might influence Colfax, have been discussed below.
Factors Favoring Colfax
Financial Performance & Bottom-Line Outlook: Colfax pulled-off a positive average earnings surprise of 7.91% in the last four quarters. This includes impact of 15.09% earnings beat recorded in the second quarter of 2018. Further, in the reported quarter, the company's bottom line grew 35.6% year over year on the back of sales growth and lower tax rate.
For 2018, Colfax believes that strengthening Fabrication Technology business, restructuring initiatives, and margin growth in the Air & Gas Handling business will be beneficial. The company increased adjusted earnings per share projection to $2.15-$2.30 from $2.05-$2.20 stated earlier. The new forecast reflects earnings growth potential of at least 24%. Effective tax rate will be 20-22%, below the earlier prediction of 23-24%. Savings from restructuring actions are predicted to be in excess of $30 million.
In the past 60 days, earnings estimates on the stock for 2018 have been increased by two brokerage firms. Estimates for 2019 have been raised by three firms versus lowered by one. Currently, the Zacks Consensus Estimate for earnings is at $2.25 for 2018 and $2.50 for 2019, reflecting growth of 0.9% and 2% from respective 60-day-ago tallies. Further, bottom-line estimates represent year-over-year growth of 29.3% for 2018 and 11.2% for 2019.
Colfax Corporation Price and Consensus
In the past three months, Colfax's shares have yielded 13.8% return, outperforming 6.1% growth recorded by the industry .
Solid Business Opportunities: Colfax gained exposure in various end markets, including oil & gas, general industrial, mining, marine, and many others, through its two platforms - Fabrication Technology, and Air & Gas Handling.
For 2018, the company anticipates that favorable pricing and healthy market conditions will support roughly 5-8% organic sales growth for Fabrication Technology. On the other hand, Air & Gas Handling will gain from improvement in orders and efficient cost structure. Moreover, popularity of the company's existing brands - ESAB (under the Fabrication Technology business) and Howden (under the Air & Gas Handling business) - as well as investments for expanding these businesses in attractive markets and boosting innovative capabilities add to the company's strength.
Buyouts and Rewards to Shareholders: Over time, Colfax easily penetrated into unexplored markets, added products to portfolio and expanded geographical footprints, with the help of acquired assets. In the first half of 2018, buyouts added roughly 8.8% to the company's sales growth.
Colfax acquired welding-wire operations of Sandvik Materials Technology in the first quarter of 2018, thereby, strengthening the Fabrication Technology segment. Moreover, acquisition of Europe-based Gas Control Equipment (deal signed in the second quarter) is projected to generate in excess of $100 million annualized revenues. The Gas Control Equipment will be integrated with Fabrication Technology segment.
Colfax believes in rewarding shareholders handsomely. The company repurchased 4.6 million shares in the first half of 2018 while had $56.1 million share buyback authorization remaining.
Factors Working Against Colfax
Risks From High Debts and Overseas Operations: High debts, if unchecked, can inflate Colfax's financial obligations and hurt its profitability. Exiting the first half of 2018, long-term debt was $1.1 billion, reflecting growth of 1.1% from the balance at the end of 2017. Furthermore, the company's total debt/total capital was 30.3% at the end of the first half of 2018 versus 28.5% at the end of fourth-quarter 2017.
Geographical diversification has exposed Colfax to headwinds, arising from geopolitical issues and unfavorable movements in foreign currencies. The company has business operations in the United States, Europe, Asia, the Middle East and South America.
Headwinds From Orders: Orders play an important role in determining Colfax's performance and growth prospects. It's worth mentioning here that second-quarter 2018 organic orders for Air and Gas Handling declined primarily due to weakness in the oil, gas, & petrochemical as well as power generation markets.
The company predicts unfavorable movement in order trends from the power generation market due to project reductions in China. Further, lower utilization in both the United States and China will be worrisome for Colfax.
Raw Material Costs: In the second quarter of 2018, Colfax's cost of sales grew 8.1% year over year while selling, general and administrative expenses increased 15.8%. As a result, in the reported quarter, the company's operating margins were down 70 basis points over the year-ago quarter.
Colfax procures raw materials - including metals, castings, motors, seals and bearings - from suppliers in the United States and international markets. This dependence has exposed the company to price fluctuations related to policies and issues of the source countries. Moreover, we believe that the ongoing trade dispute between the United States and China, as well as other foreign nations, might inflate raw material costs and hurt margins.
Stocks to Consider
Some top-ranked stocks in the industry are Altra Industrial Motion Corp. AIMC , IDEX Corporation IEX and Ingersoll-Rand plc IR . While Altra Industrial sports a Zacks Rank #1 (Strong Buy), both IDEX and Ingersoll-Rand carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
In the last 60 days, earnings estimates for each of these stocks improved for the current year. Further, average positive earnings surprise for the last four quarters was 4.01% for Altra Industrial Motion, 4.37% for IDEX and 5.29% for Ingersoll-Rand.
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