Colfax Downgraded to Neutral

We recently downgraded our recommendation from Outperform to Neutral on Colfax Corporation (CFX), anticipating it to perform in line with the market.

Why Neutral?

Colfax is one of the leading manufacturing and engineering companies specializing in products and services related to gas and fluid-handling and fabrication technology. Acquisitions, over time, have played an important role in strengthening the company’s businesses.

Recently the company signed agreements to acquire the Global Infrastructure and Industry (GII) business of Flakt Woods Group and CKD Kompresory a.s. from CKD Group. Both the acquisitions will strengthen the company’s Howden business.

Also, strong end markets, exposure to emerging markets as well as leading brands makes this company a long-term winner. The company targets organic growth of 1–2% above GDP growth, operating margins in the mid-teens level and free cash flow in excess of net income over the long run. Growth of roughly 4–6% is expected for Howden products, 6% for Mining, 9% for Power/Environment, 5–7% for Colfax Fluid Handling and 3% for Fabrication Tech.

Results in the third quarter of 2013 were impressive; however, management’s outlook for the rest of 2013 forces us to downgrade Colfax.

For the fourth quarter of 2013, management of Colfax anticipates organic revenue growth in the mid-to-high digit level for Gas and Fluid Handling segment but flat-to-down for Fabrication Technology. Earnings per share guidance for 2013 has been lowered to $1.98-$2.03 from $1.95-$2.10 expected earlier.

Moreover, international businesses expose Colfax to risks arising from negative foreign currency translation and geo-political issues, among others. Also, active competition in the gas and fluid-handling as well as fabrication technology businesses from both larger and smaller companies raise our concern.

Other Stocks to Consider

Colfax Corporation currently has a market capitalization of $5.9 billion and carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are Xylem Inc. (XYL), DXP Enterprises, Inc. (DXPE) and Middleby Corp. (MIDD). While Xylem carries a Zacks Rank #1 (Strong Buy), DXP Enterprises and Middleby holds a Zacks Rank #2 (Buy).

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