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We recently initiated our coverage on Colfax Corporation (CFX - Analyst Report), a manufacturing and engineering company, with a Neutral recommendation.

Why Neutral?

Colfax Corporation is one of the leading manufacturing and engineering companies specializing in products and services related to gas-and fluid-handling and fabrication technology. Its customer base includes a range of commercial to governmental clients, in the United States, Europe, Asia, the Middle East and South America.

Growth prospects are bright for Colfax Corporation. Strong end markets, exposure to emerging markets as well as leading brands makes this company a long-term winner. The company targets to achieve organic growth of 1-2% above GDP growth, operating margins in the mid-teens level and free cash flow in excess of net income over the long run.

Markets for Howden products are expected to grow roughly 4-6%; Mining by 6%; Power/Environment by 9%; Colfax Fluid Handling by 5-7%; and Fabrication Tech by 3%.       

Besides these, acquisitions have played an important role in the development of Colfax Corporation. Of all, the acquisition of Charter in Jan 2012 deserves special mention as it added world class welding, cutting and automation and air and gas handling business to Colfax’s portfolio. More recently an agreement has been signed to acquire the Global Infrastructure and Industry (GII) business of Flakt Woods Group.

However, the impacts of these positives are neutralized by the presence of some near-term concerns. International businesses expose Colfax to risks arising from negative foreign currency translation and geo-political issues, among others. For the three months ended Mar 29, 2013, Colfax incurred foreign currency transaction loss of around $2.9 million due primarily to devaluation of the currency of Venezuela and the change of its functional currency to Colombian peso.

Also, active competition in the gas and fluid-handling as well as fabrication technology businesses from both larger and smaller companies raise our concern.

Other Stocks to Consider

Colfax provided a year-to-date return of 53.4% and currently has a market capitalization of $5.7 billion. Other companies to look out for are EnPro Industries, Inc. (NPO - Snapshot Report), with a Zacks Rank #1 (Strong Buy) while Gorman-Rupp Co. (GRC - Snapshot Report) and DXP Enterprises, Inc. (DXPE - Snapshot Report), each carry a Zacks Rank #2 (Buy).

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