We have issued an updated research report on IDEX Corporation IEX on Mar 25.
This industrial machinery company, with a market capitalization of $11.2 billion, currently carries a Zacks Rank #3 (Hold).
A few growth drivers and certain headwinds, which might influence IDEX, have been discussed below.
Factors Favoring IDEX
Financial Performance & Share Price Movements: IDEX has a history of delivering positive earnings surprises, with a beat of 3.15% registered in fourth-quarter 2018. Average earnings beat for the last four quarters is a positive 5.42%.
It is worth mentioning here that the company’s earnings in the fourth quarter of 2018 grew roughly 17% year over year on the back of increase in revenues and benefits from productivity initiatives. The company is hopeful of delivering impressive results in 2019, gaining from solid product portfolio, diversified business structure and execution abilities. It anticipates generating adjusted earnings of $5.60-$5.80 per share for the year, reflecting increase of 4-7% from the previous year.
Post the earnings release on Jan 29, the company’s share price gained 6.3%. It has risen 17.9% in the past three months compared with the industry’s growth of 15.2%.
Top-Line Performance and View: In the fourth quarter of 2018, strengthening businesses in industrial, water, energy, food and pharma end-markets supported 5% growth in organic sales. Orders improved 2% organically on the back of growth in Fluid & Metering Technologies, and Health & Science Technologies segments.
For 2019, IDEX anticipates roughly 4-5% growth in organic sales, which in turn is expected to boost earnings by 30-50 cents per share. Total revenues for the year will likely be $2,560-$2,585 million, reflecting year-over-year growth of 3-4%.
Efficient Use of Capital: Growth investments, acquisitions and rewarding shareholders are three prime ways through which IDEX deploys capital. To begin with, acquisitions helped it in business expansion in unexplored markets and broadening of the product portfolio. For instance, the Phantom Controls buyout in June 2018 strengthened the Fire & Safety/Diversified Products segment while the Finger Lakes Instrumentation buyout in July 2018 added vigor to the Health & Science Technologies segment.
It is worth mentioning that acquisitions/divestitures had a positive 1% impact on sales in the fourth quarter of 2018.
Regarding rewards to shareholders, the company distributed $127.5 million as dividends in 2018 while repurchased $173.9 million worth of shares. For 2019, it anticipates share count reduction to boost earnings per share by 6 cents.
Factors Working Against IDEX
Poor Valuation & Earnings Estimate Revision: On a Price/Earnings (P/E) basis, IDEX’s shares appear overvalued compared with the industry. The stock is currently trading at 27.3x, higher than the industry’s 20x. Its highest and lowest levels in the past three months are 28x and 22.4x, respectively.
Further, the stock’s current valuation multiple is above the industry’s three-month highest level of 20.1x.
Regarding earnings estimates, four negative revisions have been recorded for 2019 against two positives in the past 60 days. For 2020 estimates, three positive and one negative revisions were made. Currently, the Zacks Consensus Estimate is pegged at $5.73 for 2019 and $6.13 for 2020, reflecting declines of 0.5% and 0.2% from the respective tallies 60 days ago.
IDEX Corporation Price and Consensus
IDEX Corporation Price and Consensus | IDEX Corporation Quote
High Costs and Debts: Rising cost of sales and operating expenses have been issues for IDEX over time. In the last five years (2014-2018), its cost of sales increased 2.6% (CAGR) while operating expenses grew 1.3% (CAGR). For the fourth quarter of 2018, higher engineering costs were mainly responsible for 4.7% increase in cost of sales.
For 2019, IDEX predicts corporate expenses to be approximately $80-$84 million. Also, earnings headwind of 5 cents per share is estimated from growth investments. Notwithstanding these, we believe that the trade dispute between the United States and other foreign nations might be detrimental.
In addition, high debt levels can increase the company’s financial obligations and impact profitability. Long-term debt at the end of 2018 was $848.3 million.
Forex Headwinds: Business diversification in foreign nations exposed IDEX to risks arising from geopolitical issues and unfavorable movements in foreign currencies. In the fourth quarter of 2018, forex woes adversely impacted sales growth by 1%.
For 2019, the company believes that unfavorable movements in foreign currencies will likely lower sales by 1% (or $32 million) and dilute earnings by 15 cents per share. This adversary can also lower first-quarter sales by 1% and dilute earnings by 6 cents per share.
Stocks to Consider
Some better-ranked stocks in the industry are DXP Enterprises, Inc. DXPE, Sun Hydraulics Corporation SNHY and Roper Technologies, Inc. ROP. While DXP Enterprises and Sun Hydraulics currently sport a Zacks Rank #1 (Strong Buy), Roper carries 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 all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was a positive 46.55% for DXP Enterprises, 2.27% for Sun Hydraulics and 4.96% for Roper.
Is Your Investment Advisor Fumbling Your Financial Future?
See how you can more effectively safeguard your retirement with a new Special Report, “4 Warning Signs Your Investment Advisor Might Be Sabotaging Your Financial Future.”
Click to get it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Roper Technologies, Inc. (ROP) : Free Stock Analysis Report
DXP Enterprises, Inc. (DXPE) : Free Stock Analysis Report
IDEX Corporation (IEX) : Free Stock Analysis Report
Sun Hydraulics Corporation (SNHY) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research