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Colfax (CFX) Gains From Buyouts, High Costs Remain a Drag

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We have issued an updated research report on Colfax Corporation CFX on Oct 9.

This machinery company currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $2.5 billion.

A few growth drivers and certain headwinds, which might influence Colfax, have been discussed below.

Factors Favoring Colfax

Impressive Results & Solid Outlook: Over time, Colfax delivered better-than-expected results. Earnings beat of 3.85% in the third quarter of 2018 is the company’s 12th consecutive quarter of impressive results. It’s worth mentioning here that third-quarter earnings increased 17.4% year over year on the back of 3.7% growth in sales and enhanced operational excellence.

For 2018, pricing actions, restructuring initiatives, improved productivity and lower tax rates will help in boosting bottom-line results. The company anticipates earnings of $2.20-$2.30 per share, a revised view from $2.15-$2.30 mentioned earlier. At the mid-point, the latest projection reflects year-over-year growth of at least 26%.

Solid results and outlook also lifted sentiments for the sock, which is evident from positive revision in bottom-line estimates. In the past 60 days, the stock’s earnings estimates for 2018 have been raised by five brokerage firms and lowered by three. Likewise, estimates for 2019 have been raised by seven firms and lowered by two. Currently, the Zacks Consensus Estimate for earnings is pegged at $2.25 for 2018 and $2.55 for 2019. Earnings estimates for 2018 reflect no change and estimates for 2019 reflect growth of 2% from respective 60-day-ago tallies. Further, bottom-line estimates represent year-over-year growth of 29.3% for 2018 and 13.2% for 2019.

Colfax Corporation Price and Consensus


Colfax Corporation Price and Consensus | Colfax Corporation Quote

Further, Colfax has an Earnings ESP of +0.32% for 2018 and +0.82% for 2019. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Our proven model provides some idea about the stocks that are about to release results. Per the model, a stock needs a combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 for a likely earnings beat.

Growth Through Acquisitions: Over time, Colfax easily penetrated unexplored markets, added products to portfolio and expanded geographical footprints, with the help of acquired assets. The company recently decided to acquire orthopedic solutions provider, DJO Global Inc. for $3.15 billion. In the 12 months after the completion of the acquisition, Colfax anticipates earnings per share (adjusted) accretion from DJO Global. Moreover, it seeks to enjoy tax benefits from DJO Global’s $800-million operating loss carryforwards.

Prior to this, Colfax acquired TBi, HKS and Siemens AG's Siemens Turbomachinery Equipment GmbH business in 2017. Additionally, ACH Equipos Ltda. and Advanced Combustion Inc. were added to the company’s portfolio in the third quarter of 2018 while Gas Control Equipment’s buyout was completed in October this year.

In the third quarter of 2018, acquired assets added 7.3% to sales growth.

Solid Business Opportunities: Colfax works through two platforms — Fabrication Technology, and Air & Gas Handling. Through these platforms, the company serves a vast customer base in the oil & gas, general industrial, mining, marine, and many others end markets. In the fourth quarter of 2018, the company anticipates continued growth in business and margin improvement versus the prior quarter in the Fabrication Technology segment. For the Air & Gas Handling segment, the company believes that restructuring actions will be a boon and margins will improve.

In addition, the buyout of DJO Global — to be complete in the first three months of 2019 — will diverse Colfax’s business structure and mark its entry into the orthopedic solutions industry. It is worth mentioning here that the orthopedic solutions industry currently gains from tailwinds like changing demographics and rising need for preventive healthcare among others. Upon the completion, DJO Global’s assets will form a segment within Colfax.

Factors Working Against Colfax

High Costs & Lower Margins, Poor Share Price Performance: Rising costs and expenses have been an issue for Colfax over some time. In the first nine months of 2018, the company’s cost of sales increased 11.3% year over year, and its selling, general and administrative expenses expanded 12.5%. Colfax’s gross margin contracted 49 basis points (bps) year over year and adjusted operating margin fell 90 bps. Escalating costs are mainly due to tariffs and other factors. We believe that, if unchecked, unwarranted increase in costs and expenses will continue to adversely impact margins, and profitability.

Over the past three months, the company’s shares have lost 41.5% compared with the industry’s decline of 15.7%.

Risks From Overseas Operations: Colfax has business operations in the United States, Europe, Asia, the Middle East and South America. Though geographical expansion reflects the company’s prosperity, it also exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies.

In the third quarter of 2018, unfavorable movements in foreign currencies had an adverse 4.2% impact on sales growth.

Weak Cash Position: Lately Colfax has been using its cash for funding U.S. pension expenses and ongoing restructuring initiatives. These usages adversely impacted the company’s cash positions — evident from 12.1% year-over-year decline in cash flow generated from operating activities in the first nine months of 2018.

Stocks to Consider

Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, EnPro Industries, Inc. NPO and Luxfer Holdings PLC LXFR. All these stocks currently sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for all these three stocks improved for the current year. Further, positive earnings surprise for the last quarter was 17.95% for DXP Enterprises, 23.64% for EnPro Industries and 60.61% for Luxfer.

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