SXI - Standex International: Reaching Fresh Highs

2023-08-02 16:02:44 ET

Summary

• Standex International Corporation has seen a strong margin performance as of late as it divested underperforming assets to shore up its balance sheet.
• The stronger earnings power and strong balance sheet now lay the foundation for a bolt-on deal.
• I like the operational achievements delivered upon, but fear that Standex shares have run too far, too fast.

In February, I believed that Standex International Corporation ( SXI ) was executing on its plans as it started the year on a solid note, posting strong margins in its quarterly report, while fetching a full price for a struggling business which it sold.

Liking the execution, valuations appeared to be quite reasonable for the mini conglomerate, which after a repositioning of the business was ready to grow further.

After a resilient third quarter, with margin strength seen, the company used its strong balance sheet for a bolt-on deal to ignite some growth again, although the strong share price action prevents me from getting upbeat.

Some Background

Standex posted 2021 sales of $656 million, with the fiscal year ending halfway the calendar year, with revenues reported across five divisions. The company was largely reliant on its electronics business, which was complemented by engraving, specialty solutions, scientific solutions and engineering technologies. The business posted solid operating profit of $59 million, and that was including a $15 million loss on the divested refrigeration business.

GAAP earnings for the year came in at just $3.14 per share, but adjusted earnings came in at $4.60 per share, with much of the discrepancy coming from the losses at the refrigeration business. Moreover, the company guided for earnings to rise to $5.50 per share in 2022, as leverage was low and operating momentum was seen. On the back of this prediction, shares traded around the $100 mark halfway 2021.

2022 revenues showed a meaningful improvement, with sales up 12% to $735 million, and GAAP earnings reported at $5.06 per share, with adjusted earnings coming in nearly a dollar higher, thereby surpassing the original guidance by a comfortable margin.

With first quarter sales for the fiscal year 2023 up 2%, I was working under the assumption of $750 million in revenues and earnings around $6 per share, making valuations around $100 late in 2022 largely fair, perhaps a bit cheap. Shares however rallied to $118 by early February of this year when I last looked at the shares.

The rally in the shares was driven by a $75 million deal to sell the Procon business in a deal which made that $34 million in sales would leave the door. The 2.2 times sales multiple marked a small premium to all of Standex, resulting in a flattish net cash position post this deal.

Second quarter sales rose by just a percent, but adjusted earnings were up 20% to $1.74 per share, making that while the full year revenue numbers would likely come in around the $750 million number, there was upside potential for earnings from the $6 per share number.

With the better positioned and under-leveraged business trading at roughly 19 times earnings, the situation looked largely fair, even as the company has outlined some ambitious 2028 targets, a year by which the business should grow to a billion in sales, forecasting 20% operating margins.

While I grew more appreciative of the shares, I could not get myself to initiate a position here, unfortunately.

Going Higher

Since February shares of Standex have risen another 25%, trading up from $118 to $149 at the moment of writing, within imminent reach of their highs.

In May, the company posted third quarter sales of $184 million, down 2.6% due to the divestment of Procon and the stronger dollar. The company realized a huge profit on the Procon deal, with adjusted earnings up 7% to $1.65 per share, eleven cents ahead of last year, while the company ended the quarter with $2 million in net cash. With adjusted earnings so far coming in at $4.97 per share, earnings realistically come in at $6.50 per share which is quite comforting.

That said, trading at $149 at the moment of writing, the company commands a $1.77 billion equity valuation and similar enterprise valuation, with unleveraged equity multiples having risen to 22-23 times earnings. Using the strength of the balance sheet, Standex announced a $30 million deal to acquire Minntronix on the final day of July.

The company makes both customized and standardized magnetic components used in cable fibers, smart meters, industrial controls, electrical vehicles and home security markets. Little has been said on the contribution of the deal, other than that the deal is set to be accretive to earnings and will achieve double-digit returns on invested capital, as the purchase price comes in at nearly 2% of the own valuation.

Concluding Remark

While I am happy with the progress which Standex International Corporation has made, these organic and real achievements are more than outpaced by the share price, pushing up the valuation in the meantime, which actually makes me quite cautious here, certainly as shares trade near their all-time highs.

Hence, I have no business getting involved here, although I am keen to keep a close eye on the Standex International Corporation business going forward.

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