A month has gone by since the last earnings report for Colfax Corporation (CFX - Free Report) . Shares have added about 2.1% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is CFX due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
First-Quarter 2018 Highlights
Colfax reported better-than-expected results for the first quarter of 2018. It delivered positive earnings surprise of 14.3% while surpassing sales estimates by 8.4%.
The machinery company's adjusted earnings in the reported quarter were 48 cents per share, surpassing the Zacks Consensus Estimate of 42 cents. Also, the bottom line increased 23.1% from the year-ago tally of 39 cents on the back of sales growth, rise in adjusted operating income and lower tax rate.
Organic Sales, Buyout and Forex Gains Drive Revenues
In the quarter under review, Colfax's net sales were $880.9 million, reflecting growth of 20.1% from the year-ago quarter. The improvement was driven by 4.9% contribution from existing businesses, 9.4% gain from acquired assets and 5.8% positive impact from foreign currency movements.
Also, the top line exceeded the Zacks Consensus Estimate of $812.9 million.
The company reports its net sales in two segments — Air and Gas Handling, and Fabrication Technology. The segmental information is briefly discussed below:
Revenues from Air and Gas Handling segment were $347.7 million, increasing 27.1% year over year. Results were driven by 2.4% contribution from the existing businesses, 16.8% gain from acquired assets and 7.9% positive impact from foreign currency translations.
The segment's orders were worth $327.1 million in the reported quarter, reflecting the decline of 2.5% from the year-ago quarter. The decline was due to weakness in oil, gas & petrochemical as well as power generation markets, partially offset by strong orders in the mining and general industrial, and other markets.
Backlog at the end of the quarter under review was $889.5 million, up 2.6% year over year.
Revenues from Fabrication Technology totaled $533.3 million, increasing 15.9% year over year. The improvement came on the back of 3.8% positive impact from price, 4.9% gain from acquired assets, 2.6% rise in volume and 4.6% positive impact from foreign currency translations.
As noted, the segment's North American businesses were solid. New products also helped boost the segment's performance. During the reported quarter, the company added Sandvik Materials Technology's welding-wire operations to this segment. The buyout is expected to enhance opportunities for the company in the specialty filler-metal market.
Margin Profile Weak on Higher Costs and Expenses
In the quarter under review, Colfax's cost of sales increased 23.6% year over year to $610.3 million. It represented 69.3% of net sales compared with 67.3% in the year-ago quarter. Gross margin declined 200 basis points (bps) year over year to 30.7%. Selling, general and administrative expenses increased 14.7% year over year to $200.5 million. It represented 22.8% of net sales.
Adjusted operating income in the quarter under review increased 7.9% year over year to $70.1 million. However, adjusted operating margin slipped 90 bps to 8%. Effective tax rate in the quarter was 21.1% versus 26% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the first quarter, Colfax's cash and cash equivalents were $268.3 million, roughly 2.4% up from $262 million at the end of previous quarter. Long-term debt balance increased 6.3% sequentially to $1,122.1 million.
In the reported quarter, the company used net cash of $2.7 million for operating activities versus $40.4 million generated in the year-ago quarter. Capital invested, used for purchasing fixed assets, totaled $11.1 million, reflecting a year-over-year decline of 5.2%.
For 2018, Colfax anticipates gaining from its strengthening Fabrication Technology business. Its Air & Gas Handling business is expected to improve on the back of margin growth in orders and restructuring initiatives. Also, the company expects meaningful acquisitions to support growth in unexplored markets and new business platforms.
Based on these positive aspects, the company increased adjusted earnings per share projection to $2.05-$2.20 from the previous forecast of $2.00-$2.15. The revised guidance reflects earnings growth potential of at least 18%. Restructuring measures are expected to yield minimum $25 million in savings. Effective tax rate for the year is predicted to be 23-24%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to one lower.
At this time, CFX has a subpar Growth Score of D. Its Momentum is doing a lot better with an A. The stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for momentum investors than value investors.
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, CFX has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.