CFX - Colfax Corporation

[Txvestor]

Anyone looking at CFX at these levels?

[Guest JoelS]

I purchased a small position. Some factors that influenced me:

 

- They're guiding for adjusted EPS this year of $1.83 - $1.93 and net income $1.61 - $1.71. In December last year they expected 2015 net income would be $2.20 - $2.40. On the surface it doesn't look cheap even though the price has come down a lot. But I like that the disruption in oil and gas has taken the top off acquisition prices, and I think they'll take advantage of that. They believe  there's a 3.5bn (revenue) market for consolidation, and, according to them, they rarely bump heads with tough competitors.

- Mitch Rales bought $30m worth of shares since February this year.

- The new CEO was with Danaher from 07-13'. He made a comment on the last earnings call that I liked: "strengthening cash flows is a never ending quest" Some background on him: http://www.bizjournals.com/baltimore/news/2015/07/27/new-colfax-ceo-matthew-trerotola-seemed-like-a.html

 

I'd like to think more about the bear case before I go any bigger on this one.

 

[Scudbucket]

Yes, now my second largest position after MKL.

 

 

[ccplz]

Yes, now my second largest position after MKL.

 

Why do people like roll ups so much?

[Guest notorious546]

Yes, now my second largest position after MKL.

Why do people like roll ups so much?

 

less reinvestment concern is my guess. Another thing would be that you have an nice little track record to look back on and comfort you if the market and the shares do really poorly over some short time frame.

 

that said, i'd like to hear what Scudbucket has to say.

 

 

[Scudbucket]

I'm not sure people like roll ups.  And if they do, I'm not sure why.

 

I like CFX because they are doing everything within their control right.  They have had things outside of their control that have set them back - EM, O&G headwind, FX, and some operational challenges.  That said, I think they are phenomenal operators and at the business level keep improving every day.  You can see this in their margins.  They talk about it on their calls by how they're optimizing their plants or closing them down.  They make it easier for their customers to use their equipment and they lower their customers' costs, too.  I like that win-win mentality, and I think over the long-term, it should do well for them by winning new business and subsequent after-market business as well.

 

I take the view that I am investing in a business.  I don't really care what the stock price does day-by-day except to the extent I can get a good price.  I am fairly young, and my time frame is measured in decades, not years.  Ideally, I would like the shares to trade down more.  This is somewhat paradoxical but the worse things get the better they get because 1) I can buy more shares at a lower price and 2) the probability that CFX buys another business at a cheaper price goes up.

 

How I can be wrong is that their end markets get hit really bad.  However, I don't believe O&G end markets will stay in this slump for a long time.  I think in five years we'll look back and think this was ridiculous.  I also think EM/China will continue to get bigger and play an even larger role in the global economy over my lifetime.  In fact, it is going to be interesting when MSCI and other benchmark providers eventually reclassify China out of EM.  Additionally, they can make a poor acquisition.  However, based upon their track record at Danaher, I think it's unlikely to be such a poor acquisition it's a deal breaker.

 

At less than 1x sales, it's very attractive to me.

[AzCactus]

Anyone taking a look at this at these prices?

[ccplz]

They talk about it on their calls by how they're optimizing their plants or closing them down.  They make it easier for their customers to use their equipment and they lower their customers' costs, too.

 

Their competitors do that too.

 

Ideally, I would like the shares to trade down more.  This is somewhat paradoxical but the worse things get the better they get because 1) I can buy more shares at a lower price

 

Great job, you've shown you can copy what Buffett can say.

 

2) the probability that CFX buys another business at a cheaper price goes up.

 

How does this work? If their stock price goes down, doesn't it make it harder for them to make acquisition?

 

 

[AzCactus]

They talk about it on their calls by how they're optimizing their plants or closing them down.  They make it easier for their customers to use their equipment and they lower their customers' costs, too.

 

Their competitors do that too.

 

Ideally, I would like the shares to trade down more.  This is somewhat paradoxical but the worse things get the better they get because 1) I can buy more shares at a lower price

 

Great job, you've shown you can copy what Buffett can say.

 

2) the probability that CFX buys another business at a cheaper price goes up.

 

How does this work? If their stock price goes down, doesn't it make it harder for them to make acquisition?

 

CC-Not saying anything you bring up is incorrect.  However, aren't the Rale's brothers known to be far above average capital allocators.  If I'm not mistaken there record at Danaher was quite good.  If history doesn't repeat itself, but if it does rhyme that could be good for shareholders. 

[jschembs]

They talk about it on their calls by how they're optimizing their plants or closing them down.  They make it easier for their customers to use their equipment and they lower their customers' costs, too.

 

Their competitors do that too.

 

Ideally, I would like the shares to trade down more.  This is somewhat paradoxical but the worse things get the better they get because 1) I can buy more shares at a lower price

 

Great job, you've shown you can copy what Buffett can say.

 

2) the probability that CFX buys another business at a cheaper price goes up.

 

How does this work? If their stock price goes down, doesn't it make it harder for them to make acquisition?

 

How about you stop being a dick and provide something more constructive to the board?

[ccplz]

 

CC-Not saying anything you bring up is incorrect.  However, aren't the Rale's brothers known to be far above average capital allocators.  If I'm not mistaken there record at Danaher was quite good.  If history doesn't repeat itself, but if it does rhyme that could be good for shareholders.

 

Yes, the Rale brothers are supposed to be skilled capital allocators. Their track record at Danaher has been very good. But how much of that was due to skill and how much was due to luck? It's hard to tell, given that they don't write as much as Warren Buffett, so we just don't know what the rationale was behind the investments they made.

 

I guess the question is whether or not they can replicate that record with Colfax. It's hard to understand the story. People (including users on this board) keep talking about how great a company it is, but I feel a lot of that is due to the hype surrounding the Rale Brothers + Danaher, and how enamored people are with a possible 'outsider' CEO. I'm having trouble seeing how Colfax is doing things differently from their competitors, and I don't see a lot of hard facts being presented.

 

 

[Jurgis]

I bought a tiny bit today. Was a coin toss between this, DNOW and NOV. ;) Not that either of the three are easy to value if energy sector continues to be shot.

 

This is not an endorsement, do your own DD and all that.

[jay21]

 

CC-Not saying anything you bring up is incorrect.  However, aren't the Rale's brothers known to be far above average capital allocators.  If I'm not mistaken there record at Danaher was quite good.  If history doesn't repeat itself, but if it does rhyme that could be good for shareholders.

 

Yes, the Rale brothers are supposed to be skilled capital allocators. Their track record at Danaher has been very good. But how much of that was due to skill and how much was due to luck? It's hard to tell, given that they don't write as much as Warren Buffett, so we just don't know what the rationale was behind the investments they made.

 

I guess the question is whether or not they can replicate that record with Colfax. It's hard to understand the story. People (including users on this board) keep talking about how great a company it is, but I feel a lot of that is due to the hype surrounding the Rale Brothers + Danaher, and how enamored people are with a possible 'outsider' CEO. I'm having trouble seeing how Colfax is doing things differently from their competitors, and I don't see a lot of hard facts being presented.

 

I don't think their margin expansion is due to luck. Getting the right timing on end market cycles is probably luck.

[Scudbucket]

They talk about it on their calls by how they're optimizing their plants or closing them down.  They make it easier for their customers to use their equipment and they lower their customers' costs, too.

 

Their competitors do that too.

 

Ideally, I would like the shares to trade down more.  This is somewhat paradoxical but the worse things get the better they get because 1) I can buy more shares at a lower price

 

Great job, you've shown you can copy what Buffett can say.

 

2) the probability that CFX buys another business at a cheaper price goes up.

 

How does this work? If their stock price goes down, doesn't it make it harder for them to make acquisition?

 

 

Hi CCPLZ,

 

People who have worked for DHR and now CFX are sought out for their six sigma expertise.  If you look at manufacturing / operational excellence job descriptions across Fortune 500 companies, it's not uncommon to find DHR/CFX-specific experience wanted or preferred.  To me, that says the quality and execution learned at those companies is better than at competitors.  It's a hard thing to quantify, so if you need numbers to feel comfortable then you probably won't find it in this line of thought. 

 

In regards to the paradox statement, my answer is that it depends upon how any deal would be structured.  If the deal is financed with equity, then yes you may be right if the price of the deal is too high.  However, it doesn't have to be financed with equity; debt and cash are the other options or some other form I’m not thinking of.  I also think the probability management uses equity to finance a deal and dilute shareholders is very low given their incentives and history.  As end-markets continue getting weaker, other companies will also trade down, thereby hopefully offering lower prices at which CFX can acquire them.  That was my thought process.  It’s definitely possible management does a dilutive deal, and if they do I will revisit my thesis.

 

In terms of differentiating between skill and luck for the Rales, whenever there are these extreme outliers of success I think both need to be present.  It's hard to determine the magnitude of each, though.  I'll say their track record is long and full of data points.  Compared to the base rate of other similar companies during similar time periods, their track record is standard deviations above of what we would have expected due to chance.  I agree that the past doesn't matter in terms of returns.  I do believe the past is indicative of human behavior, though, and what people did and how they reacted in certain situations is a fair indicator of the future.

 

One side note: I think it is unreasonable that investors think they know more about a company than management or insiders.  As outsiders, I think it's virtually impossible to know the intricacies of what actually happens behind the scenes.  Reading Ks and Qs and triangulating with customers and the supply chain will only get you so much information.  At the end of the day, I think it's better to invest in situations where incentives are aligned and the people have track records of being reasonable and honest in their dealings.  Perhaps you are smarter than me, CCPLZ; however, I invest according to my temperament and what suits me.

 

[AzCactus]

Anyone long here adding at these prices?

[Scudbucket]

Very likely.

[kab60]

I don't really get this. ROIC looks pretty terrible - also before oil plunged.

[fareastwarriors]

In case anyone was interested... please see attached.

Oppenheimer_-_INITIATION_OF_COVERAGE_-_CFX.pdf

[Scudbucket]

Hi,

 

Does anyone have the Citi report that was just released they could share?

 

Many thanks in advance.

 

Scud

[ZenaidaMacroura]

In case anyone was interested... please see attached.

Lol, I read that as "invitation of courage"  -which is incendetally not a bad research/buy writeup title for some hairy companies.

[netnet]

Last week's Barrons (Jan 16)

 

Deflated Pump Maker Colfax Will Revive

Despite likely weakness in the company’s business in 2016, the shares look tempting long-term.

By David Englander

January 16, 2016

 

Colfax’s products include pumps for offshore drilling rigs Photo: Jan Stromme/Getty Images

 

The energy collapse has taken down the shares of industrial companies of all stripes that rely on the sector. Among those that have come under the heaviest pressure is pump and welding-products maker Colfax. Its stock has cratered 75% since June 2014, when oil was above $100 a barrel.

 

At a recent $20 the stock (ticker: CFX) has been all but left for dead. With oil hitting a new low last week, this column is willing to tiptoe into the shares. Assuming oil prices don’t stay at $30 forever, the stock looks like a bargain.

 

Colfax sells its heavy-duty pumps to pipeline firms and to oil producers for use on drilling rigs. Its other major business, selling welding products, also caters to oil and gas customers. As they have pared their expenditures, demand has come down sharply.

 

Colfax has been restructuring its businesses, taking costs out to navigate the downturn. Even with oil prices dragging at their lows, earnings aren’t expected to fall much further. The balance sheet is solid, and free-cash-flow conversion exceeds 125% of net income.

 

Cowen analyst Joseph Giordano looks for earnings of $1.41 a share this year, down 8% from his 2015 estimate, on 5% lower revenue. But when acquisition-related amortization is added back, he estimates cash earnings at $1.60. Colfax will report 2015 results in February.

 

AT JUST OVER 12 TIMES cash earnings, the stock is cheap for a high-quality industrial. That valuation could help put a floor under it. The estimated free-cash-flow yield is also attractive at 9%. Giordano values the shares at $40, based on his discounted cash flow analysis. Investors shouldn’t expect that price right away, but in the next year or two, the stock could move a lot higher.

 

Founded in 1995 by Steven and Mitchell Rales, the brothers who started Danaher (DHR), Colfax has grown through acquisitions into a company with roughly $4 billion in revenue. In the past five years alone, revenue is up over 400%. Mitchell Rales, the chairman, owns 9% of the stock.

 

Like Danaher, Colfax has developed its own system for integrating acquisitions and improving profitability, called the Colfax Business System. Colfax’s brands are top-notch, and many hold leading market positions.

 

Colfax’s revenue is split evenly between gas- and fluid- handling products and welding gear. It makes engine pumps for big tanker ships, pumps that move oil and gas through pipelines, and industrial fans that ventilate mines. Its welding products include arc-welding equipment and cutting machines.

 

Colfax’s other markets are power generation, commercial marine vessels, metal fabrication, and mining. Emerging markets account for nearly half of sales. While those markets have been under strain lately, they have the potential to drive strong growth over the next five to 10 years.

 

In the near term, the outlook for Colfax’s markets isn’t great. On the October earnings call, CEO Matt Trerotola said he believes that “these downturns are cyclical, not structural,” but cautioned that a recovery might not occur until 2017. Trerotola joined Colfax in July from a senior role at DuPont.

 

In the September quarter, Colfax’s sales fell 17% from the year-earlier level; that includes a 12% drop related to the impact of unfavorable foreign-currency exchange. In oil and gas, sales actually rose 2%, but orders dropped 14%, which doesn’t bode well for 2016. The commercial marine and mining sectors are also expected to be weak this year.

 

POWER GENERATION, benefiting from new plants in China and a steady aftermarket business, may be the sole bright spot for Colfax in 2016. Company guidance calls for a total sales decline of about 5%, on an organic basis.

 

In 2012, Colfax bought the much larger Charter International, Europe’s biggest welding-equipment maker, for $2.4 billion. ESAB, as the business is known, has been a poor performer. Weakness in welding-intensive businesses, such as oil and gas drilling and shipbuilding, has hurt. Operational troubles also have weighed on margins. Management is working to turn the unit around, both operationally and through new products. Last year, margins were about 10%, compared with a goal in the midteens. That represents a real opportunity for improvement.

 

Colfax’s restructuring could reduce its cost structure by $100 million annually from the level at which the company began in 2015.

 

Colfax has been a serial acquirer, but given the weakness in its markets, it’s possible that it will hold off on making a big acquisition for a while, and instead focus on improving operations. In October, management initiated a $100 million stock-buyback program, suggesting that it considers its own stock a good investment.

 

Clearly, Colfax management believes that its businesses are solid and its markets will recover. In time, too, so should its stock.

[CorpRaider]

I like it....at $16-ish.

[bonkers]

The problem with Colfax is not only with the industry exposure (Oil&Gas, mining, coal power among others), but also high share of emerging markets (50 % of sales). "The right markets" as they used to say. "Where the growth is" as they used to say.

 

Well, certainly EM currencies will not depreciate to zero, but I cannot say how low they can go. So where is any kind of solid ground for sales (and profits)?

[sae85400]

New CFO announced recently 

[chrispy]

In an interview from 2014 Chuck Akre mentions how CFX was their biggest position:

 

 

I was quite amazed to see how the stock had performed since then... Does anyone know when he sold out? I've been reviewing his compounding machine approach and portfolio and this seems to be the biggest failure.

 

In hindsight, what were the red flags on Colfax? It's concentration on oil and gas, shipping, and emerging markets after a small EM bull market following the GFC?