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Colfax (CFX) Poised to Gain From Buyouts, Suffers From Debts

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We have issued an updated research report on Colfax Corporation (CFX - Free Report) on May 15.

This machinery company currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $3.1 billion.

A few growth drivers and certain headwinds, which might influence Colfax, have been discussed below.

Factors Favoring Colfax

Financial Performance & Outlook: Results for the first quarter of 2019 surpassed estimates, with positive earnings beat of 8.2%. Profitability gained from acquired assets, growth in existing businesses and margin improvement. Including the results, its average earnings surprise for the last four quarters was 9.16%.

In the first half of 2019, the company anticipates adjusted earnings per share of $1.11-$1.14, up from $1.09 recorded in the year-ago comparable period. Earnings will likely be $2.55-$2.65 per share in 2019 versus $2.31 recorded in 2018.

Solid Segmental Business: Colfax operates through three segments, namely Air and Gas Handling, Fabrication Technology, and Medical Technology. Through these platforms, the company serves a vast customer base in oil & gas, general industrial, mining, marine, and many other end markets.

In the first half of 2019, the company anticipates Air & Gas Handling, and Fabrication Technology segments to perform well. For the year, core sales of Air & Gas Handling are predicted to grow in a mid to high-single digit and that of Fabrication Technology is expected to expand in a mid-single digit.

Acquisitions: Colfax believes in making acquisitions for boosting the product portfolio and expanding operations in international arenas. Notably, acquisitions added 19.2% to sales growth in the first quarter of 2019.

In 2018, the company acquired and added Sandvik Materials Technology’s welding-wire operations and Gas Control Equipment to its Fabrication Technology segment as well as made two buyouts for its Air & Gas Handling segment. In February 2019, the company completed the acquisition of DJO Global, which marked  Colfax’s entry into the orthopedic solutions industry.

In the first half of 2019, the company predicts that DJO Global and other acquisitions will boost results.

Factors Working Against Colfax

Share Price Performance and Earnings Estimate Revision: Market sentiments are against Colfax for quite some time now. In the past three months, the company’s shares have declined 1.5% against the industry’s growth of 4.5%. It is worth noting that the decline of 3.9% was recorded in the share price after the release of earnings results for the first quarter of 2019 on May 8.

In addition, it can be observed that analysts have become bearish on the company’s growth prospects. In the past seven days, four downward revisions and one upward revision have been recorded for 2019 earnings estimates while two downward revisions and three upward revisions have been recorded for 2020.

Currently, the Zacks Consensus Estimate for the company’s earnings is pegged at $2.60 for 2019 and $2.92 for 2020, reflecting declines of 0.4% and 1% from the respective seven-day-ago numbers.

Colfax Corporation Price and Consensus

Colfax Corporation Price and Consensus

Colfax Corporation price-consensus-chart | Colfax Corporation Quote

Risks Arising From High Debts: At the end of the first quarter of 2019, Colfax had a long-term debt of $4,037.1 million, up significantly from $1,192.4 million in the previous quarter. Higher debts also increased the company’s interest expenses by 203.7% year over year in the quarter. Furthermore, its total debt/total capital was 115.6% at the end of the first quarter of 2019 versus 34.5% at the end of fourth-quarter 2018.

We believe that such a highly leveraged balance sheet seems to be a concern for Colfax as it inflates financial obligations and hurts profitability.

Forex Woes: Geographical diversification, with presence in the United States, Europe, Asia, the Middle East and South America, is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the first quarter of 2019, forex woes adversely impacted sales growth by 6.4%.

The company predicts forex woes to adversely impact results in the first half of 2019.

Stocks to Consider

Some better-ranked stocks in the industry are Roper Technologies, Inc. (ROP - Free Report) , DXP Enterprises, Inc. (DXPE - Free Report) and Dover Corporation (DOV - Free Report) . While Roper currently sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Dover carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for all three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 48.47% for DXP Enterprises, 8.43% for Roper and 8.61% for Dover.

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