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Here's Why it is Worth Holding on to Colfax (CFX) Stock Now

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We issued an updated research report on Colfax Corporation CFX on Oct 15.

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 $3.4 billion.

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

Factors Favoring Colfax

Healthy Projections: The company anticipates fully consolidated adjusted earnings of $2.55-$2.65 per share or adjusted earnings from continuing operations of $1.90-$2.00 in 2019. For the third quarter, adjusted earnings from continuing operations are predicted to be 45-50 cents.

Also, organic sales for the Fabrication Technology segment are predicted to increase in a low-single digit in the second half of 2019.

In the past three months, the company’s share price has gained 8.5% against the industry’s decline of 3.7%.

Inorganic Activities: Colfax is committed toward strengthening its portfolio through inorganic moves, including divestments and acquisitions. In 2018, the company strengthened its Fabrication Technology segment through acquisitions of Sandvik Materials Technology's welding-wire operations and Europe-based Gas Control Equipment.

In addition, Colfax acquired DJO Global in February this year, marking its entry into the orthopedic solutions industry. Also, the company completed the divestment of its Air & Gas Handling business in September 2019. The divestment will likely enable Colfax to attain its leverage target and increase profitability as well as support buyouts in its Fabrication Technology and Medical Technology segments.

Long-Term Growth Prospects: Colfax is posed to gain from product developments, focus on strengthening segmental businesses, expansion in emerging markets (including China, India, Brazil and others), productivity actions and acquired assets.

Over the long term, the company anticipates organic sales to grow 1-2% above GDP and segmental margin to be in the mid-teens level. It follows a sound capital-allocation strategy, which adds to its investment appeal.

Factors Working Against Colfax

Cost Hurdles and Lowered Earnings Estimates: We believe that rising costs of sales and operating expenses are concerning for Colfax. In second-quarter 2019, the company recorded a 44.4% increase in costs of sales while selling, general and administrative expenses expended by 126.5% year over year. For 2019, it expects corporate expenses of approximately $60-$65 million.

In the past 60 days, the company’s earnings estimates have been lowered, reflecting bearish sentiments. Currently, the Zacks Consensus Estimate for its earnings is pegged at $1.94 for 2019 and $2.17 for 2020, reflecting declines of 4.4% and 4% from the respective 60-day-ago figures.

Colfax Corporation Price and Consensus


Colfax Corporation Price and Consensus
Colfax Corporation Price and Consensus

Colfax Corporation price-consensus-chart | Colfax Corporation Quote

Forex Woes: Geographical diversification — with presence in the United States, Europe, Asia, the Middle East and South America — is reflective of a flourishing business of Colfax. However, this diversity has exposed the company to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies.

In the second quarter of 2019, forex woes adversely impacted the company’s sales growth by 4.6%. Persistence of such headwinds will likely impact its top-line results.

Highly-Leveraged Balance Sheet: High debts can be concerning for Colfax as it raises financial obligations and might adversely impact profitability.

Exiting second-quarter 2019, the company’s long-term debt was approximately $4,078.2 million, reflecting sequential growth of 1%. Net interest expenses in the quarter were $33.2 million, higher than $12.9 million recorded in the year-ago quarter. Also, the company is more leveraged than the industry, with respective long-term debt-to-capital ratios of 56.3% and 45.3%.

For 2019, Colfax predicts interest expenses (continuing operations) of approximately $125 million.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are AZZ Inc AZZ, Graham Corporation GHM and ESCO Technologies Inc ESE. While AZZ currently sports a Zacks Rank #1 (Strong Buy), Graham and ESCO Technologies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Current-year earnings estimates for the companies have improved in the past 60 days. Further, positive earnings surprise for the last reported quarter was 14.08% for AZZ, 100% for Graham and 3.85% for ESCO Technologies.

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