EPAC - Standex International: Shares Offer Upside On Continued Top And Bottom Line Growth

2023-11-16 13:47:28 ET

Summary

• Standex International is a diversified industrial manufacturer with five different operating segments.
• The company has shown growth in both revenue and profits in recent years, driven mostly by the Electronics and Specialty Solutions segments.
• Management has optimistic expectations for future growth, aiming to generate $1 billion in annual revenue by 2028.
• Add on top of this how shares are decently priced, and it makes for a soft 'buy' to the author.

Some companies are really easy to describe. This is because they offer one specific product or service or line of products or services. Others are far more complex, with many working parts to them. A great example of the latter can be seen by looking at Standex International (SXI). Management describes the company as a diversified industrial manufacturer. But when you look at the six different operating segments that have been aggregated into five different reporting segments, you find an incredibly diverse enterprise. Given all that's going on in the economy, I can understand why investors might be concerned about anything in the industrial space. But the fact of the matter is that management has done quite well in recent years to grow the firm, both on its top line and on its bottom line. Shares of the business are not exactly cheap. But they are affordable enough to warrant some optimism from this point on. Because of this, I have decided to rate the business a soft 'buy'.

An interesting firm with a pathway forward

As I mentioned already, Standex International is a diverse player in the industrial manufacturing space. There's not one word or phrase that can truly encompass all that the business does. So it might be helpful to dig into each of its units. The first of its segments is the Electronics segment. Through this, the company provides sensing and switching technologies, as well as magnetic power conversion components and similar technologies, to a wide variety of customers. These products go into things like appliances, security products, medical products, modes of transportation, and much more. This happens to be the largest of the company's segments, accounting for 41.3% of its revenue and 46.6% of its profits in 2023.

Next, we have the Engraving segment. This unit is a creator and provider of custom textures and surface finishes that are used on tooling for the purpose of improving the appearance of consumer goods and automotive products. Last year, this segment accounted for 20.5% of the company's revenue and for 17.2% of its profits. The Scientific segment, meanwhile, produces specialty temperature-controlled equipment for industries like the medical space, industrial firms, and more. This equipment can be used in the creation of laboratories or similar facilities in the form of specialty refrigerators or freezers. It also includes cryogenic storage tanks and incubators. 10.1% of the company's revenue and 11.6% of its profits came from this segment.

The next segment that the company has is Engineering Technologies. This particular unit is responsible for technologies that go into the construction of fuel tanks, rocket engine components, spacecraft structures, turbines for energy production, and more. 10.9% of the company's revenue and a modest 7.5% of its profits come from this segment. Finally, we have the Specialty Solutions segment which is comprised of two different businesses. The first of these is Federal Industries, which provides merchandising solutions to retail and food service customers. Examples include refrigerated, heated, and dry display cases and similar offerings. The other company is known as Custom Hoists, and it focuses on supplying hydraulic cylinders to customers for the production of dump trucks, garbage trucks, hook lift trucks, compactors, and more. This unit was responsible for 17.2% of the company's revenue and for 17.1% of its profits last year.

In recent years, management has done a solid job of growing the company's top line. Sales have grown in each of the past three years, climbing from $656.2 million in 2021 to $741 million in 2023. Most of the upside scene from a sales perspective came from two of the company's operating segments. The biggest contributor was the Electronics segment, which saw revenue jump from $253.4 million to $305.9 million over this three-year window of time. Growth would have been even greater had it not been for foreign currency fluctuations. We do know, however, that the company benefited significantly from robust demand in a wide variety of industries such as the electric vehicle market, certain renewable energy technologies, and more. The other contributor to much of this growth was the Specialty Solutions business, which saw revenue expand from $100.9 million to $127.1 million. Higher pricing and increased sales volumes were reflective of robust market demand for what the company offers.

With revenue on the rise, profits have also increased. The company went from generating net profits of $36.5 million in 2021 to generating profits of $139 million last year. To be clear, this is a little deceptive. And that's because there are many one-time items that go into the mix that investors should pay attention to. For instance, in 2023, Standex International reported a $62.1 million gain on the sale of certain assets. A more appropriate measure of profitability given this would probably be cash flow. The good news is that even these metrics have fared quite well. As an example, operating cash flow grew from $81.9 million in 2021 to $90.8 million in 2023. On an adjusted basis, it expanded from $86.3 million to $109 million. And finally, EBITDA for the business expanded from $111.6 million to $139.5 million.

In the years to come, management has some pretty optimistic expectations for the company. They currently believe that, by 2028, they can generate $1 billion in annual revenue. That focuses only on organic revenue. So any acquisitions made are certain to add to this growth.

So far, management is on the way toward additional growth. I say this because, in the first quarter of 2024 , the business reported $184.8 million. That's 2.3% above the $180.6 million reported one year earlier. Without exception, every profitability metric reported by management got better year over year as well. This much can be seen in the chart above.

While it's great to focus on the future, investors should not be comfortable with paying a premium for uncertain growth in the future. And since we don't have any guidance for the 2024 fiscal year on its own, I would encourage us to value the company based on 2022 and 2023 data. In the chart above, you can see precisely that. The stock looks quite affordable using two of the three profitability metrics while looking closer to fair value using the other. In the table below, meanwhile, I compared the company to five similar firms. When it came to the price to earnings of the approach, I found that it was the cheapest of the group. However, using the other two profitability metrics, three of the five companies ended up being cheaper.

Takeaway

At this point in time, it seems clear to me that the management team at Standex International is doing a fine job of growing the company. Shares are far from being in the bargain bin, but they also aren't, in my opinion, at the point of being fairly valued. Because of all of these factors, I've decided to rate the company a soft 'buy'.

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