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Colfax (CFX) Benefits From Acquired Assets Despite Costs Woes

Zacks Equity Research

We issued an updated research report on Colfax Corporation CFX on Jan 3.

The company manufactures products and services related to medical and fabrication technology. It currently has a Zacks Rank #3 (Hold) and market capitalization of approximately $4.3 billion.

Below, we have discussed why it will be prudent for investors to hold on to this stock for now.

Factors Favoring Colfax

Medical Technology: Colfax has two reportable segment — Fabrication Technology and Medical Technology. The second segment includes results of DJO Global. It specializes in providing medical technologies related to the orthopedic field. Major brands, which are globally recognized, are Aircast, DonJoy and ProCare, among others.

In the third quarter of 2019, the segment’s sales increased 3.9% year over year. Organic sales expanded 4.5%. The segment is expected to benefit from reconstructive product launches as well as improvements in prevention and rehabilitation products in the quarters ahead. Its core sales are predicted to grow 5.5% in the fourth quarter of 2019.

Acquired Assets: The company has been benefiting from acquisitions over time. In the third quarter, acquired assets (including DJO Global) boosted Colfax’s sales by 65%.

Notably, the company acquired DJO Global in February 2019. It marked Colfax’s entry into the orthopedic solutions industry. In 2018, the company acquired Sandvik Materials Technology's welding-wire operations and Europe-based Gas Control Equipment for the Fabrication Technology segment.

Colfax believes that acquired assets will prove beneficial in the quarters ahead.

Growth Prospects: Healthy sales performance benefited Colfax’s results in the third quarter of 2019. The company believes to generate earnings in the range of $1.90-$2.00 per share in 2019.

In the past three months, shares of the company have gained 29.7% compared with the industry’s growth of 12.6%.

In the long run, rising exposure in emerging markets (including China, India, Brazil and others), focus on product developments, acquired assets and productivity actions will be beneficial. Also, a sound capital-allocation strategy will continue to aid.

Factors Working Against Colfax

High Costs, Weak Earnings Estimates: If unchecked, rising costs and expenses might affect Colfax’s financials. In the third quarter of 2019, the company’s cost of sales increased 35.6% year over year and its selling, general and administrative expenses expanded 124.2%.

The company’s earnings estimates have been lowered in the past 60 days. Currently, the Zacks Consensus Estimates is pegged at $2.20 for 2020, which reflects a decline of 0.9% from the 60-day ago figure. The estimates for 2019 (results not yet released) remained stable at $1.98.

Colfax Corporation Price and Consensus


Colfax Corporation Price and Consensus

Colfax Corporation price-consensus-chart | Colfax Corporation Quote


Woes Related to International Exposure: Colfax has operations in the United States, the Middle East, Asia, Europe and South America. A diverse footprint reflects on Colfax’s flourishing business.

On the flip side, international operations have exposed Colfax to risks stemming from geopolitical issues and unfavorable movements in foreign currencies. In the third quarter of 2019, forex woes adversely impacted the company’s sales growth by 2.8%.

Huge Debts: A highly leveraged balance sheet is a headwind, as high debts increase financial obligations. At the end of third-quarter 2019, Colfax’s long-term debts were $4,002.4 million. This figure rose 235.7% from the 2018 end level. Also, the company’s interest expenses rose 159.5% year over year in the first three quarters of 2019.

Apart from these factors, the company seems to be more leveraged than the industry. Long-term debt-to-capital ratio for the company is 56.8% compared with the industry is 47.3%.

Stocks to Consider

Some better-ranked stocks in the industry are Kaman Corporation KAMN, DXP Enterprises, Inc DXPE and Standex International Corporation SXI. While Kaman currently sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Standex carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for Kaman and DXP Enterprises have improved for the current year, while the same has been unchanged for Standex. Further, positive earnings surprise for the last reported quarter was 17.95% for Kaman, 16.39% for DXP Enterprises and 2.11% for Standex.

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