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IDEX's Holistic Growth Prospects Mired in Operating Risks

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On Jun 21, we updated the research report on industrial goods manufacturer, IDEX Corporation (IEX - Free Report) .

IDEX is currently striving to expand its businesses in the emerging markets by focusing on organic growth. The company reported organic growth of 5% in the first quarter of 2017, the first such growth since the fourth quarter of 2014, owing to a diligent execution of operational plans. IDEX further aims to increase its market exposure and improve sales mix by continually developing new products. With a flexible yet disciplined focus on cost and productivity, the company expects to successfully tap newer markets to augment its revenues.

At the same time, IDEX is striving to improve productivity through heavy restructuring initiatives across its portfolio. The company aims to exploit suitable acquisition opportunities to fuel its inorganic growth momentum. These acquisitions expand its geographic reach, fill technology gaps and strengthen its foothold in the existing markets along with expanding its product lines. In the last three months, IDEX has outperformed the Zacks categorized Machinery-General Industrial sector with an average return of 23.6% compared with 8.5% gain for the latter.



However, with operations across five continents, IDEX’s performance is exposed to the adverse impact of macroeconomic cycles in the U.S. and international markets. Given its global presence, the company also faces unfavorable foreign currency movements, impacting its bottom-line growth. In addition, its business strategy hinges on acquiring companies and making investments that complement its existing businesses. These acquisitions entail huge integration costs which often become a drag on the profitability of IDEX.

In addition, the company operates in a highly competitive industry. Maintaining and improving its competitive position entails continued investment in manufacturing, engineering, quality standards, marketing, customer service, and support and distribution networks. This involves huge recurring R&D expenses that increase its operating costs. This also reduces IDEX’s price control over its products, which often leads to loss of market share, decline in top-line growth and lower operating margin.

To add to the woes, IDEX procures substantial amount of raw materials and components from suppliers across the globe, which make it susceptible to various operating risks. These include the availability and prices for raw materials, curtailment or change in parts and components, interruptions in production by suppliers and prevailing price levels. These affect its cash flow and restrict its growth momentum to some extent.

Nevertheless, we remain impressed with the holistic growth impetus of this Zacks Rank #3 (Hold) stock. Some better- ranked stocks in the industry include Barnes Group Inc. (B - Free Report) , Ingersoll-Rand Plc (IR - Free Report) and Colfax Corporation , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Barnes has a long-term earnings growth expectation of 9%. It topped estimates in each of the trailing four quarters with an average earnings surprise of 8.9%.

Ingersoll-Rand has a long-term earnings growth expectation of 9.8%. It topped estimates thrice in the trailing four quarters with an average earnings surprise of 3.6%.

Colfax has a long-term earnings growth expectation of 10.8%. It topped estimates in each of the trailing four quarters with an average earnings surprise of 9.5%.

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