SXI - Standex: Executing On Its Plans

Summary

• Standex has started 2023 on a solid note.
• The company posted strong margins for the second quarter and fetched a full price for a divestment.
• I like the execution part of Standex, but valuations appear fair at best.

In mid-January, I called Standex ( SXI ) a solid performer, executing on the back of its improved positioning. The mini conglomerate has benefited from a better positioning of its business activities, albeit accompanied by a small reduction in the size of the operations, now being ready to start growing again.

The Base Case

Standex generated $656 million in sales in the fiscal year 2021 (with the results already reported halfway the calendar year) with revenues generated within five divisions. The company relies largely on its electronics business, complemented by engraving, specialty solutions, scientific solutions and engineering technologies. The company posted an operating profit of $59 million that year, including a $15 million loss on the divested refrigeration business.

Such earnings power made that GAAP earnings were reported at $3.14 per share, yet adjusted earnings (mostly adjusted for the losses of the divested operations) came in as high at $4.60 per share. More so, the company guided for strong growth in 2022, as earnings might easily rise to $5.50 per share, leverage was low, as the company still owned a struggling engineering solutions business through which some value might be created.

Despite the rosy set-up, shares fell to $80 over the past summer, but they had rebounded to $107 per share in January again. The 2022 results revealed that sales rose 12% to $735 million, with earnings coming in at $61 million, or $5.06 per share based on GAAP accounting, albeit that adjusted earnings came in nearly a dollar higher.

First quarter results, as released in November of last year, revealed a mere 2% increase in sales as the company guided for flattish earnings in the second quarter. This made a $750 million sales run rate and $6 earnings per share power for 2023 likely realistic, as I believed that shares looked largely fairly valued.

Doing Well

Since January, shares of Standex have risen to $118 per share, marking a decent 10% return in the time frame of less than a month. Early in February the company shared quite some news as the company announced the sale of the Procon Pumps business alongside the release of the second quarter earnings report.

Standex reached a deal with European-based Investindustrial to sell the Procon business in a $75 million deal, shedding nearly $34 million in sales along the way, indicating that a 2.2 times sales multiple has been fetched. Few other details were announced, other than the rationale which is to further simplify and streamline the business. With nearly 12 million shares outstanding, the deal is equivalent to about $6 per share as the sales multiple reflects a small premium to the overall valuation of Standex here. The divestment makes that the company operates with a flattish net cash position pro forma for the transaction.

Second quarter sales rose a mere 1% to $188 million, essentially in line with the guidance. Earnings improved meaningfully to $20 million, with GAAP earnings posted as high as $1.69 per share, as adjusted earnings rose 20% to $1.74 per share as well. For the third quarter, the company expects a very modest decrease in sales, but this is attributable to currency moves and the Procon divestment. Margins should hold up quite well, and the company has seen strong margins in the second quarter, as Standex is still on track to earn $6 per share (or even a bit higher) with the pro forma balance sheet now revealing a flattish net debt position.

Still Fairly Valued

Truth is that I am quite impressed with the sales multiple fetched for Procon, as well as notably the margins in the second quarter earnings report. That good news is pretty much overshadowed by the solid performance of the shares over the last couple of weeks. A current 18-19 times multiple and unleveraged business looks attractive, as the third quarter outlook is not too convincing.

That being said, Standex has issued some ambitious 2028 targets, a year in which it expects to post sales around a billion, with operating margins seen near 20%. If that is the case, an unleveraged business might post earnings around $150 million, about $12 per share, roughly doubling from today.

If that becomes realistic, shares of Standex looks quite compelling, but that requires heavy lifting, notably on the margin front, as the inspirations are interesting.

Amidst all this I am growing more appreciative of the company and its shares, looking for a pullback before getting involved.

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