The U.S. government’s policy changes have been in the news for quite some time now. While the market has wholeheartedly welcomed tax policy changes implemented in December last year, those relating to imposition of tariffs on imported items have triggered trade disputes with other nations. This headwind, along with those arising from inflationary pressures and unfavorable movements in foreign currencies, has been adversely hurting corporate results.
The Zacks Industrial Products sector currently holds the second position among the 16 Zacks sectors.
Cost inflations, forex woes and tariff impacts have been issues for industrial stocks of late. However, healthy growth in the country’s GDP, strengthening housing market, new job additions, favorable tax changes and rise in industrial production have been positives. In the past two years, the sector has gained 24.7%.
The Industrial Products sector currently offers a number of investment-friendly options. We would like to discuss about two industrial stocks — Colfax Corporation CFX and Flowserve Corporation FLS — that hold healthy growth prospects and carry a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
How to Choose the Best Bet Among These 2 Stocks?
Let’s briefly discuss the factors that can be used as deciding parameters for finding the best pick between these two industrial stocks. Before we begin, a quick recap of the business profile of these companies will be of help.
Colfax engages in the manufacturing and distribution of equipments and services required in fabrication technology and air and gas handling. The company has a current market capitalization of $4.3 billion and sports a Zacks Rank #1. On the other hand, Flowserve, with $7.2 billion market capitalization, specializes in manufacturing flow control equipments as well as provides various aftermarket equipment services. Flowserve carries a Zacks Rank #2.
Price Performance: Both the stocks have yielded positive returns in the past six months, outperforming the gain of 3.5% recorded by the industry. While Flowserve’s shares have rallied 26.6%, Colfax gained only 12.9%.
Six-Month Price Performance Chart
Earnings ESP: The favorable combination of an Earnings ESP of +4.31% for the third quarter of 2018 and a Zacks Rank #2 gives Flowserve an edge over Colfax. Earnings ESP for Colfax is 0.00% for the quarter.
Per our proven model, combination of a positive Earnings ESP and a Zacks Rank #1, 2 or 3 (Hold) increases the possibilities of an earnings beat by a company. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Dividend Yield: Flowserve believes in rewarding its shareholders through dividend payments. In the last five years (2013-2017), the company’s annual dividend rate has increased from 56 cents in 2013 to 76 cents in 2017. Its quarterly dividend rate is currently pegged at 19 cents per share. At present, the company’s dividend yield is 1.4%.
On the other hand, Colfax does not pay any dividends to its shareholders.
Margin Profile: Flowserve’s margin profile (on a TTM basis) seems much better than Colfax.
Flowserve’s gross margin and earnings before interest, tax, depreciation and amortization (EBITDA) margin is at 29.8% and 11.6%, respectively. These figures are higher than 28.6% gross margin and 9.8% EBITDA margin recorded for Colfax in the trailing 12 months.
Return on Capital: Flowserve scores better than Colfax in terms of how efficiently it uses shareholder’s funds. Its return on equity for the trailing 12 months is 10.5%, above Colfax’s 6.6%.
Also, Flowserve’s return on assets (ROA) is 3.7% and return on investment (ROI) is 5.6%, higher than Colfax’s ROA of 3.6% and ROI of 5.1%.
Liquidity: Flowserve’s strong liquidity position is a boon, placing it in a better position than Colfax. The company has current ratio of 2.25, which measures its ability to pay current and long-term liabilities. Also, its cash and cash equivalents were $517.4 million at the end of the second quarter of 2018.
On the other hand, Colfax’s current ratio is 1.81 while its cash and cash equivalent, at the end of the second quarter, was $257.7 million.
Earnings Estimates: In the past 30 days, Flowserve’s earnings estimates for 2018 have been revised 0.6% upward while that for 2019 have been raised roughly 1%.
Colfax’s earnings estimates for both 2018 and 2019 have been stable during the same time period.
In the next five years, Flowserve’s earnings are predicted to grow 17.3%, higher than 12.8% expected for Colfax and 13% estimated for the industry.
Our Take
Considering the factors discussed above, Flowserve seems to be a better investment choice than Colfax for investors seeking exposure in the industrial space.
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