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We recently upgraded our recommendation from Neutral to Outperform on Colfax Corporation (CFX - Analyst Report). The company is one of the leading manufacturing and engineering companies specializing in products and services related to gas-and fluid-handling and fabrication technology.

Why Outperform?

Acquisitions, over time, have played quite an important role in strengthening Colfax Corporation’s businesses. There were the recently announced agreements to acquire CKD Kompresory a.s. from CKD Group and Global Infrastructure and Industry (GII) business of Flakt Woods Group. Both are anticipated to boost the company’s Howden line of business through the addition of broad product portfolio and large customer base.

Besides acquisitions, strong end markets, exposure to emerging markets as well as leading brands makes Colfax 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%.       

With regard to the company’s financial performance, earnings per share in the second quarter 2013 came in at 54 cents, up 60.0% year over year and one cent above the Zacks Consensus Estimate. Revenue grew 2.7% due to solid contributions from acquisitions, more than offsetting weakness in organic business and negative foreign currency translation impact. Backlogs were strong at the end of the quarter. Adjusted operating margin expanded 160 basis points to 10.9%.

For 2013, management of Colfax anticipates adjusted earnings per share to range within $1.95-$2.10. Considering all these, we upgraded our view on Colfax which has a Zacks Rank #2 (Buy), to a positive stance.

Other Stocks to Consider

Colfax currently has a market capitalization of $5.8 billion and provided a year-to-date return of 54.6%. Other companies to look out for in the industry are Manitex International, Inc. (MNTX - Snapshot Report), with a Zacks Rank #1 (Strong Buy) while Dover Corporation (DOV - Analyst Report) and Ingersoll-Rand Plc (IR - Analyst Report), each carry a Zacks Rank #2 (Buy).

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