SXI - Standex: Good Growth Prospects But Not A Buy At Current Levels

2023-05-12 11:26:06 ET

Summary

• SXI’s revenue growth in FY24 should benefit from healthy demand in its end markets.
• The margins should continue to improve due to pricing actions, productivity improvements, and higher margin products.
• Based on my DCF calculation and relative valuation, I have a hold rating on the stock.

About the Company

Standex International Corporation ( SXI ) stands as a prominent player in the industrial manufacturing sector, boasting a wide range of products and services catering to diverse commercial and industrial end markets. With a comprehensive portfolio, SXI offers a variety of solutions, including electronic sensors, temperature control equipment, merchandising solutions tailored for the food industry, engraving services, and custom hoists. These offerings find their applications in a myriad of industries, such as defense, energy, space, automotive, food and beverage, medical, and general industry. SXI has five operating segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions.

Q3 FY23 Financial Performance Overview

SXI recently announced its financial results for the third quarter of FY23, surpassing market expectations. Despite a slight year-on-year decline, the company managed to generate $184.4 million in revenue during the quarter, exceeding the consensus estimate of $178.09 million. The 2.6% decrease was primarily attributed to the Procon divestiture contributing 1.6% and a 2.5% impact from foreign exchange fluctuations. However, this decline was partially offset by a commendable organic growth rate of 1.5%, showcasing the company's resilience in a challenging market environment.

In addition to the revenue performance, SXI demonstrated exceptional growth in adjusted EPS, which surged by 7.1% to $1.65, exceeding the market consensus estimate of $1.57. The boost in adjusted EPS can be attributed to two key factors: improvements in the adjusted operating margin and the implementation of strategic share buyback initiatives. The adjusted operating margin notably increased by 140 basis points year-on-year, reaching an impressive 15.2%. This growth was primarily driven by the successful implementation of pricing actions and productivity gains across the company's manufacturing facilities.

Outlook

SXI continues to witness robust demand for its products, although revenue growth is facing certain challenges due to the recent divestiture of its Procon business and unfavorable foreign exchange translation. As we look towards the fourth quarter of FY23, I anticipate low single-digit negative revenue growth, primarily driven by the impact of the Procon divestiture. However, this decline is expected to be partially offset by healthy demand in SXI's end markets.

Within the electronics segment, while there is softness in the appliances and distribution end markets, SXI is experiencing strength in power management, renewable energy, and electric vehicle (EV)-related markets. In particular, the company's isolation relays, which are designed to withstand high voltages, play a critical role in solar inverters, contributing to its position in the renewable energy sector. Furthermore, given the increasing electronic content in EVs compared to conventional internal combustion engines, SXI is well-positioned to capitalize on this opportunity. In the engraving segment, positive trends are expected to continue, driven by increased demand in the automobile industry. Soft trim tools, laser engraving, and tool finishing are anticipated to show strong growth, aligning with the rising demand for automotive products.

The scientific segment is poised for a more favorable year-over-year comparison, as the surge in COVID-related vaccine storage units, which boosted revenue in the previous year, is now fully behind. The engineering technologies segment is expected to benefit from new product developments and favorable project timing in the aviation and space end markets. SXI's spin-forming capability and custom magnetic solutions have enabled the company to secure new projects with its customers. On the other hand, the specialty solutions business is anticipated to face moderate impacts over the next few quarters. This is primarily due to the divestiture of the Procon business in February 2023 and decreased sales in the display merchandising sector as a result of reduced demand.

SXI's diligent efforts in implementing pricing actions, upgrading facilities, and driving productivity improvements have proven fruitful, leading to a remarkable improvement in margins over the past 10 quarters. The company has successfully enhanced margins by an impressive 520 basis points, a testament to its strategic initiatives. Looking ahead, with a higher-margin product portfolio and a continued focus on efficiency, I anticipate further margin improvements in the upcoming quarters.

SXI's regional presence and strong customer relationships play a crucial role in safeguarding the company against prevailing supply chain challenges and inflationary pressures. By establishing a strong foothold in key markets, SXI benefits from localized operations, enabling it to mitigate risks associated with global supply chain disruptions. Additionally, the company's disciplined approach to pricing and productivity acts as a shield, helping it navigate through inflationary pressures without compromising profitability. Furthermore, SXI's commitment to maintaining strong customer relationships ensures stability and consistency in its business operations. By understanding customers' needs and delivering high-quality products and services, the company fosters long-term partnerships that provide stability and mitigate potential disruptions.

Valuation

In my DCF calculations, I am assuming revenue growth to be flat Y/Y in 2023, given the weak first three quarters and anticipated fourth quarter. Beyond 2023, I have assumed growth to be in the high-single digits, with a terminal growth rate in the mid-single digits, as the company will continue to benefit from developments in the electric vehicle industry and renewables energy market. I used a discount rate of 7.76% and arrived at a fair value of $137.28 for SXI.

Using the relative valuation, the stock is currently trading at 18.19x FY24 consensus EPS estimate of $7.42, which is at a premium to its five-year average forward P/E of 17.11x.

Conclusion

In conclusion, Standex International Corporation ( SXI ) has demonstrated its resilience and adaptability in the face of challenges, as evidenced by its recent financial performance. Despite headwinds caused by the divestiture of its Procon business and foreign exchange fluctuations, SXI has shown healthy demand for its products and has successfully navigated through various market dynamics. The company's focus on margin improvement through pricing actions, facility upgrades, and productivity initiatives has resulted in significant margin expansion over the past several quarters. This positive trend, coupled with a higher-margin product portfolio, bodes well for future margin growth prospects. Despite all these positives, I have a hold rating and would not prefer to buy at current levels.

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