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Colfax’s Investment Appeal Weakens on Rising Costs, Debt


We have issued an updated research report on Colfax Corporation CFX on Apr 11.

Exposures in emerging markets, focus on innovative products and gains from buyouts are to benefit Colfax in the years ahead. However, industry competition, rising costs and expenses remain prime concerns.

Despite solid growth opportunities that are stemming from inorganic strategies — including both acquisition of meaningful businesses and divestment of non-core assets — and healthy segmental businesses, we believe that this machinery company faces several headwinds that can jeopardize financial performance in the near-term.

The company, with $3.8 billion market capitalization, currently carries a Zacks Rank #4 (Sell). Below, we have briefly discussed the prevalent headwinds for Colfax.

Share Price Performance and Earnings Estimate Revision: In the last three months, Colfax’s shares have edged down 25.8%, worse than 7.3% decline recorded by the industry.

Also, earnings estimates of the company for both 2018 and 2019 were decreased by two brokerage firms. Currently, the Zacks Consensus Estimate is at $2.10 for 2018 and $2.34 for 2019, reflecting the decline of 0.9% and 0.8%, respectively, from the 60-day ago tallies.

Colfax Corporation Price and Consensus

Colfax Corporation Price and Consensus | Colfax Corporation Quote

Threats From Order Weakness, High Costs and Huge Debts: In 2017, orders for Colfax’s Air and Gas Handling segment suffered from weakness in power generation, oil, gas & petrochemical and mining markets. We believe that persistence of such weakness might be detrimental to the segmental performance. The company expects organic revenues for the Air and Gas Handling segment to be flat to down 2% in 2018.

Also, rising costs and expenses, as well as a high debt level, if unchecked, can prove detrimental to the company’s profitability. For instance, cost of sales in the fourth quarter of 2017 grew 7.8% year over year while selling, general and administrative expenses increased 17%. Gross and operating margin slipped 20 and 200 basis points, respectively, in the quarter. Also, long-term debt was roughly $1.1 billion while exiting the quarter.

Overseas Operations Raise Risks: Expansion of business in international arenas exposed Colfax to risks, arising from adverse movements in foreign currencies. Also, uncertainties in the economic growth of the countries served can severely impact the company’s businesses. Moreover, Colfax also procures raw materials, including metals, castings, motors, seals and bearings, from international suppliers. Changes in foreign nations’ pricing policies can hurt the company’s supply channel.

Industry Competition an Issue: Colfax faces stiff competition from companies that are offering similar products and services or those which are producing different items for same uses. Some key players in the industry are DXP Enterprises, Inc. DXPE, Dover Corporation DOV and Kadant Inc. KAI. While DXP Enterprises sports a Zacks Rank #1 (Strong Buy), both Dover and Kadant carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last 60 days, earnings estimates for each of these stocks improved for the current year. Also, average positive earnings surprise for the last four quarters was 189.56% for DXP Enterprises, 7.26% for Dover and 18.89% for Kadant.

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