We have issued an updated research report on Colfax Corporation (CFX - Free Report) on Jul 9.
This machinery company currently carries a Zacks Rank #4 (Sell), a downward revision from its earlier Zacks Rank #3 (Hold). Its market capitalization is approximately $3.8 billion.
Let’s delve deeper and discuss what led to the company’s poor investment appeal.
Share Price Performances, Earnings Estimate Revision: Currently market sentiments seem to be against Colfax, as evident from roughly 25.7% decline in the company’s share price in the past six months. This stock’s six-month performance underperformed 10.8% decline recorded by the industry and 13.9% decrease recorded by the Zacks Industrial Products sector.
Also, the company’s earnings estimates for 2018 and 2019 have been decreased in the past 60 days. The stock’s Zacks Consensus Estimate is pegged at $2.14 for 2018 and $2.35 for 2019, representing declines of 0.5% and 0.4% from their respective 60-day-ago tallies.
Raw Material Costs: Colfax’s cost of sales grew 23.6% year over year in the first quarter of 2018 while selling, general and administrative expenses increased 14.7%. As a result, in the reported quarter, the company’s gross and operating margins were down 200 basis points (bps) and 90 bps, respectively.
Since Colfax procures raw materials — including metals, castings, motors, seals and bearings — from suppliers in the United States and international markets, it remains vulnerable to price fluctuations associated with policies and issues of the source countries. We believe that the current trade dispute between the United States and China, as well as other foreign nations, might result in higher raw material costs for the company and adversely impact its margins.
Long-Term Debt & Other Headwinds: Colfax’s highly leveraged balance sheet is concerning. Long-term debt at the end of first-quarter 2018 was $1.1 billion, reflecting sequential growth of 6.3%. Also, the company’s total debt/total capital was 29.4% at the end of the first quarter versus 28.5% at the end of fourth-quarter 2017.
Also, the company faces risks from uncertain global economic conditions and unfavorable movements in foreign currencies. Moreover, fall in industrial activities and difficult financial conditions in countries, where the company operates, might adversely hurt sales, earnings and cash flow.
Orders: Orders is an important metric for Colfax, playing an important role in determining the company’s performance and growth prospects. In first-quarter 2018, the company’s Air and Gas Handling segment suffered from weak orders from the oil, gas & petrochemical, and power generation markets. In the quarters ahead, projects reduction in China is expected to keep orders weak from the power generation market. Also, the company’s results will be adversely impacted by lower utilization in both the United States and China.
Stocks to Consider
Some better-ranked stocks worth considering in the industry are Luxfer Holdings PLC (LXFR - Free Report) , Roper Technologies, Inc. (ROP - Free Report) and Kadant Inc. (KAI - Free Report) . While Luxfer Holdings sports a Zacks Rank #1 (Strong Buy), both Roper 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 last four quarters has been 4.61% for Luxfer Holdings, 2.95% for Roper and 15.50% for Kadant.
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