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IDEX Gains From Solid Demand & Buyouts Amid Cost & Forex Woes

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We issued an updated research report on IDEX Corporation IEX on Nov 15, 2018.

This machinery company currently carries a Zacks Rank #3 (Hold), marking a downward revision from its earlier Zacks Rank #2 (Buy). Its market capitalization is approximately $10.3 billion.

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

Factors Favoring IDEX

Financial Performance & Bottom-Line Outlook: IDEX pulled off a positive average earnings surprise of 5.80% in the last four quarters. This includes impact of 7.63% earnings beat recorded in the third quarter of 2018. Further, in the reported quarter, the company’s earnings grew 30.6% year over year on the back of sales growth and diligent execution of productivity initiatives.

For 2018, IDEX believes that robust sales growth, productivity initiatives and acquired assets will be advantageous. It raised its earnings per share guidance from $5.27-$5.35 to $5.35-$5.37.

In the past 30 days, earnings estimates on the stock for 2018 have been increased by ten brokerage firms and lowered by one. Likewise, estimates for 2019 were increased by seven firms and lowered by one. Currently, the Zacks Consensus Estimate for earnings is pegged at $5.36 for 2018 and $5.77 for 2019, reflecting growth of 0.9% and 0.7% from respective 30-day-ago tallies. Further, bottom-line estimates represent year-over-year growth of 24.4% for 2018 and 7.6% for 2019.

IDEX Corporation Price and Consensus

IDEX Corporation Price and Consensus | IDEX Corporation Quote

Further, the company’s earnings in the next three to five years are projected to grow 10.30%.

Year to date, IDEX’s shares have yielded 1.3% return against 8.4% decline recorded by the industry.

Solid Business Opportunities: IDEX gained exposure in various end markets, including industrial, water, energy, food, pharma and many others, through its three segments — Fluid & Metering Technologies, Health & Science Technologies, and Fire & Safety/Diversified Products.

In the third quarter of 2018, organic sales increased 9% and orders grew 7% year over year. For 2018, organic sales are projected to grow by 8% versus 7% predicted earlier. The revised guidance compares favorably with 6% organic growth registered in 2017. For the fourth quarter, organic sales growth is anticipated to be 5-6%.

Currently, the Zacks Consensus Estimate for revenues on the stock is pegged at approximately $2.5 billion for 2018 and $2.6 billion for 2019, reflecting year-over-year growth of 8.8% and 4.1%, respectively.

Impressive Capital Allocation Strategy: IDEX effectively uses its cash flow to augment growth opportunities and reward shareholders handsomely. Notably, through acquisitions, IDEX easily penetrated unexplored markets, added products to portfolio and expanded geographical footprints. In the past few quarters, the company has acquired thinXXS Microtechnology AG (December 2017), intellectual property assets of Phantom Controls (June 2018) and Finger Lakes Instrumentation (July 2018).

The company rewards its shareholders through dividend payments and share buybacks. It used $33 million for paying dividends and $31 million for repurchasing shares in the third quarter of 2018. It’s worth mentioning here that the quarterly dividend rate was hiked by 16% in April 2018.

Factors Working Against IDEX

Rising Costs and Expenses: In the first nine months of 2018, IDEX recorded 9.6% increase in the cost of sales and 4% hike in operating expenses. In the last five years (2013-2017), the company’s cost of sales increased 1.8% (CAGR) and operating expenses grew 1.9% (CAGR). We believe that unwarranted rise in costs and expenses will prove detrimental to the company’s margins, and profitability.

For 2018, IDEX predicts that its corporate expenses will be approximately $78-$80 million versus $76-$80 million mentioned earlier.

Headwinds From Currency Translation: Geographical diversification is reflective of a flourishing business of IDEX. However, this diversity exposed it to headwinds, arising from geopolitical issues and unfavorable movements in foreign currencies. The company anticipates that forex woes will have an adverse 1% impact on sales growth in the fourth quarter of 2018.

Poor Valuation: We believe that IDEX is overvalued relative to the industry as suggested by its Price to Earnings Ratio (P/E) metric. P/E is a key metric that shows how much investors are willing to pay for each dollar of earnings in a given stock. For IDEX, the trailing 12-month P/E ratio is pegged at 25.6, higher than the industry’s P/E of 19.9 for the year-to-date period. This somewhat makes us cautious about the stock.

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 sport a Zacks Rank #1 (Strong 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 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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