During the last 30 days, Colfax has received 10 upward earnings estimate revisions for both its current year and fiscal 2019. The stock was recently upgraded by Cowen & Co. to ‘Outperform’.
Colfax Corporation (CFX)
From Argus Weekly Staff Report
Our rating on Colfax Corporation (CFX) is BUY. Over the long term, we see Colfax, a well-managed mid-cap company with a focus on power generation, energy and infrastructure, as an emerging leader in the Industrial sector.
Colfax has two primary segments: Fabrication Technology (61% of 1Q sales) and Air & Gas Handling (39%). In the Fabrication Technology segment, organic revenue continued positive for the fifth quarter in a row, rising 8.2%. The adjusted operating margin was 12.7%, up 40 basis points year-over-year. Management said that most regions are now growing. For the next few quarters, we continue to look for mid-single-digit revenue growth along with further margin gains, toward management’s goal of 19%.
Air and Gas Handling is still struggling. Segment revenue declined 13% on an organic basis but increased 3%, including acquisitions. The adjusted operating margin narrowed from 9.8% to 7.3%, reflecting a shift in the sales mix that we think may be temporary. The segment’s business line-up is changing, due to M&A. This should be positive. Segment orders in 2Q increased 6%, including the impact of acquisitions.
Management is focusing on margins in a difficult top-line environment, and has targeted $25 million of restructuring savings in 2018 after achieving $100 million in savings in 2016-2017. Management’s goal is for mid-teens segment margins. In 2Q, the adjusted operating margin widened to 9.6% from the prior-year quarter of 8.9%.
Colfax has a history of growing via M&A, and management integrates acquired businesses through the ‘Colfax Business System,’ which focuses on the continuous improvement of
acquired companies and is modeled on the highly successful Danaher Business System. In recent quarters, earnings have been weak due to the company’s exposure to the energy and mining industries, and to unfavorable currency effects.
But the company recently touched an inflection point, and EPS are growing again. Colfax reported 2Q18 EPS that topped expectations, and management boosted its 2018 EPS estimate. Based on expectations for an improvement in the second half for the Air & Gas Handling group, as well as the impact of lower corporate taxes, we are boosting our 2018 EPS estimate to $2.25 from $2.15. Our estimate is above the midpoint of management’s guidance range and implies growth of 29% for the year. We look for growth to continue into 2019 and are boosting our EPS forecast to $2.48 from $2.35.
The shares have been weak for a few months due to a change in customer ordering patterns. We look for sales to smooth out in the second half of the year. We see value in the CFX shares. Our target price of $40 assumes a P/E ratio of 16-times next year’s earnings, below the midpoint of the company’s historical range.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, August 24, 2018