SXI - Standex: Solid Performer

Summary

• Standex International Corporation has seen a solid performance in recent years, since the business has improved its positioning.
• Valuation multiples have come down a bit, probably to fair value in this interest rate and economic environment.
• I still consider Standex International Corporation shares to be fairly valued after a run higher in recent weeks and months.

In March of last year, I SXI)%20Summary%20Standex%20International%20has%20seen%20a%20solid%202021.%20The%20company%20benefited%20from%20a%20recovery%20in%20end%20markets%20and%20better%20positioning%20of%20the%20operations%20in%20recent%20years.%20After%20having%20shrunk%20the%20business%20in%20recent%20years,%20it%20is%20time%20to%20grow%20again,%20amidst%20a%20very%20strong%20balance%20sheet.%20Een%20man%20bouwt%20een%20piramide%20van%20blokken%20van%20zakenwinkels.%20Bouwen%20aan%20een%20succesvol%20zakenimperium.%20Expansie%20en%20concurrerende%20groei.%20Franchise%20concessie%20concept.%20Commerci%C3%ABle%20netwerkontwikkeling.%20Andrii%20Yalanskyi/iStock%20via%20Getty%20Images%20%20A%20year%20ago,%20I%20last%20looked%20at%20Standex%20International%20(NYSE:SXI)%20as%20I%20concluded%20that%20the%20company%20was%20getting%20leaner,%20but%20not%20necessarily%20appealing%20yet.%20The%20company%20has%20been%20selling%20off%20some%20underperforming%20assets%20in%20recent%20years,%20resulting%20in%20the%20company%20shrinking%20considerably%20while%20earnings%20have%20been%20largely%20flat.%20After%20this%20repositioning%20has%20seen%20near%20completion,%20Standex%20is%20well-positioned%20and%20able%20to%20grow%20again%20here.%20%20Former%20Take%20Early%20in%202021,%20I%20last%20looked%20at%20Standex%20as%20it%20has%20been%20active%20to%20shed%20underperforming%20assets%20as%20the%20leaner%20and%20better-positioned%20company%20traded%20around%20%2495%20at%20the%20time.%20%20To%20understand%20where%20the%20company%20was%20coming%20from,%20we%20go%20back%20to%20the%20fiscal%202019%20results,%20a%20year%20in%20which%20revenues%20were%20reported%20at%20%24791%20million%20while%20earnings%20came%20in%20at%20%243.75%20per%20share.%20The%20company%20divested%20its%20refrigeration%20solutions%20unit%20after%20the%20end%20of%20that%20fiscal%20year.%20The%20deal%20was%20far%20from%20a%20winner,%20as%20Standex%20fetched%20just%20%2411%20million%20while%20shedding%20%24150%20million%20in%20sales,%20resulting%20in%202020%20sales%20being%20down%20to%20just%20%24604%20million%20on%20which%20earnings%20of%20%243.33%20per%20share%20were%20reported.%20Leverage%20was%20under%20control,%20coming%20in%20at%20less%20than%201%20times%20EBITDA.%20%20Early%20in%20the%20calendar%20year%202021,%20the%20company%20posted%20its%20second%20quarter%20results%20for%20its%20fiscal%20year%202021,%20as%20sales%20were%20up%20modestly%20and%20earnings%20were%20seen%20around%20%244%20per%20share.%20This%20makes%20that%20earnings%20have%20been%20flattish%20from%20the%20level%20posted%20a%20few%20years%20ago%20while%20sales%20were%20down%20significantly%20from%20a%20historic%20peak%20at%20around%20a%20billion.%20Based%20on%20the%20situation%20at%20the%20time,%20with%20shares%20trading%20near%20the%20%24100%20mark,%20I%20concluded%20that%20the%20valuation%20looked%20more%20than%20fair%20already.%20%20What%20Happened?%20Fast%20forwarding,%20the%20company%20has%20seen%20meaningful%20growth%20in%20the%20fiscal%20year%20of%202021,%20ending%20in%20June%20of%20that%20year.%20Revenues%20were%20up%20nearly%209%%20to%20%24656%20million.%20These%20revenues%20are%20generated%20from%20five%20different%20divisions%20of%20which%20electronics%20is%20by%20far%20the%20biggest%20with%20a%20quarter%20of%20a%20billion%20in%20sales,%20accompanied%20by%20solid%20segment%20margins.%20Notably,%20growth%20in%20renewable%20energy%20and%20semiconductor%20markets%20have%20been%20drivers%20for%20this%20segment,%20although%20the%20company%20supplies%20many%20switching%20and%20sensing%20solutions%20to%20a%20wide%20range%20of%20OEMs.%20%20Engraving%20is%20the%20second-largest%20unit,%20yet%20sales%20only%20rose%202%%20to%20%24147%20million%20in%202021.%20This%20business%20provides%20custom%20textures%20and%20surface%20finishes%20to%20enhance%20the%20beauty%20and%20function%20of%20many%20consumer%20and%20automotive%20goods,%20as%20softer%20volumes%20in%202021%20of%20automotive%20production%20withheld%20growth.%20%20The%20three%20remaining%20units%20are%20specialty%20solutions,%20scientific%20solutions%20and%20engineering%20technologies%20which%20posted%20revenues%20of%20%24101%20million,%20%2480%20million%20and%20%2475%20million,%20respectively.%20Specialty%20solutions%20are%20active%20in%20telescopic,%20wet%20line%20kits%20and%20pumps%20and%20merchandise%20displays,%20among%20others.%20The%20scientific%20unit%20is%20the%20most%20profitable%20business%20in%20terms%20of%20margins%20by%20providing%20laboratory%20and%20medical%20refrigerators%20among%20others,%20as%20this%20business%20has%20clearly%20benefited%20from%20the%20pandemic.%20Engineering%20solutions%20is%20somewhat%20the%20troubled%20child%20in%20terms%20of%20margins%20as%20its%20activities%20include%20that%20of%20providing%20fuel%20tanks,%20combustion%20lines,%20among%20other%20applications.%20%20The%20company%20posted%20operating%20income%20of%20%2459%20million,%20but%20that%20includes%20a%20%2415%20million%20loss%20on%20the%20divested%20(refrigeration)%20business.%20This%20makes%20that%20GAAP%20earnings%20actually%20fell%20from%20%243.33%20to%20%243.14%20per%20share,%20yet%20adjusted%20earnings%20improved%20spectacularly%20from%20%243.49%20to%20%244.60%20per%20share.%20%20In%20November%20of%20last%20year,%20the%20company%20reported%20%24175%20million%20in%20first%20quarter%20sales%20for%20the%20fiscal%20year%202022,%20up%2016%%20on%20the%20year%20before.%20Adjusted%20earnings%20of%20%241.34%20per%20share%20were%20up%20significantly%20year-over-year%20but%20down%20a%20few%20pennies%20on%20the%20year%20before.%20In%20February,%20the%20company%20posted%20strong%20second%20quarter%20sales%20with%20sales%20of%20%24185%20million,%20up%2019%%20on%20the%20year%20before,%20as%20adjusted%20earnings%20rose%20to%20%241.45%20per%20share.%20%20Valuation%20Thoughts%20With%20adjusted%20earnings%20so%20far%20this%20year%20trending%20at%20%242.80%20per%20share,%20a%20%245.50%20per%20share%20number%20looks%20realistic,%20although%20there%20are%20many%20moving%20parts%20in%20the%20world%20right%20now.%20Continued%20buybacks%20have%20shrunken%20the%20share%20count%20to%2012.1%20million%20shares%20which%20at%20%24107%20translates%20into%20a%20%241.30%20billion%20equity%20valuation.%20Net%20debt%20of%20%2453%20million%20is%20very%20minimal%20as%20EBITDA%20for%20the%20first%20half%20of%20the%20year%20already%20came%20in%20at%20%2463%20million,%20translating%20into%20a%20minimal%200.4%20times%20leverage%20ratio.%20%20Based%20on%20the%20current%20earnings%20power,%20I%20believe%20that%20shares%20trade%20at%2019-20%20times%20earnings%20which%20looks%20fair%20amidst%20a%20reasonably%20good%20positioning%20and%20strong%20balance%20sheet,%20as%20shares%20have%20held%20up%20quite%20well%20during%20the%20latest%20period%20of%20volatility.%20%20To%20use%20this%20strong%20balance%20sheet,%20Standex%20announced%20a%20bolt-on%20deal%20in%20March%20with%20the%20near%20%2410%20million%20purchase%20of%20Sensor%20Solutions.%20These%20specialty%20sensors%20are%20used%20in%20a%20wide%20range%20of%20structural%20growth%20markets%20as%20the%20%249.7%20million%20purchase%20price%20is%20equal%20to%202.2%20times%20the%20anticipated%20revenue%20contribution%20of%20%244.3%20million.%20While%20that%20marks%20a%20small%20premium%20over%20the%20revenue%20multiple%20at%20which%20Standex%20trades,%20this%20looks%20like%20a%20fine,%20yet%20truly%20bolt-on%20deal%20as%20it%20adds%20less%20than%20a%20percent%20to%20overall%20sales.%20%20Concluding%20Thoughts%20The%20truth%20is%20that%20Standex%20has%20transformed%20itself%20into%20a%20higher%20value-added%20industrial%20conglomerate%20which%20has%20stopped%20shrinking%20in%20terms%20of%20revenues%20and%20is%20now%20showing%20solid%20earnings%20growth%20as%20well.%20This%20is%20compelling%20amidst%20a%20strong%20balance%20sheet%20yet%20is%20already%20awarded%20a%20very%20small%20premium%20to%20the%20overall%20market%20at%2019-20%20times%20earnings.%20At%20these%20levels,%20the%20valuation%20is%20roughly%20fair%20albeit%20that%20further%20refinement%20in%20the%20business%20portfolio%20(with%20divestments%20at%20fair%20prices)%20might%20be%20able%20to%20squeeze%20out%20a%20higher%20valuation.%20%20I%20guess%20the%20valuation%20here%20is%20just%20fair,%20albeit%20that%20the%20company%20is%20now%20much%20better%20positioning%20for%20continued%20earnings%20growth%20than%20it%20was%20in%20the%20past,%20creating%20a%20rosier%20long-term%20investment%20proposition,%20yet%20a%20fair%20proposition%20right%20here." > concluded that Standex ( SXI ) was a better performing mini conglomerate. The company has seen a solid 2021 and has been better positioning its business activities in recent years, yet after the business has shrunk a bit in previous periods, it was time to start growing again.

A Recap

Ahead of the pandemic, Standex International Corporation generated $791 million in sales in 2019, on which it posted earnings equal to $3.75 per share. The company was active in a wide range of activities, albeit that it sold its refrigeration business in a deal which fetched just $11 million, while $150 million in sales would leave the door. On the back of this divestment and generic softness during the pandemic, the company saw 2020 sales fall to $604 million, with earnings down to $3.33 per share.

With a recovery seen in 2021 (the fiscal year ends in June of the year), Standex posted a 9% increase in sales to $656 million, generated from no less than five divisions. The electronics business was responsible for about a quarter of a billion in sales. This was complemented by smaller units which include engraving, specialty solutions, scientific solutions, and engineering technologies. Most of these units were doing fine in terms of margins, albeit that the engineering solutions (which provides fuel tanks and combustion lines) has seen real margin struggles.

The company posted a $59 million operating loss in 2021, as GAAP earnings fell from $3.33 to $3.14 per share. The year included a $15 million loss on the divested refrigeration business. Adjusted for this lost and some other items, adjusted earnings rose from $3.49 per share to $4.60 per share.

The company saw solid double-digit revenue growth in the first quarters of the fiscal year 2022, as a $5.50 per share run rate looked realistic. With Standex International Corporation shares trading at $107 per share, the valuation came in at 19–20 times, as net debt of $53 million was minimal in relation to reported EBITDA. The improved performance was a good sign, yet valuations were not cheap at a fair valuation multiple of 19–20 times, albeit that a "solution" for the engineering solutions might create some value. Nonetheless, the overall full valuation left few reasons to get involved.

Struggling

Like the rest of the market, shares of Standex have seen concerns on softer economic growth, higher interest rates, and a strong dollar as well. Through the summer shares fell to the $80 mark, and after some volatile trading action in the autumn, shares went back up to $107 per share, pretty flat compared to March of last year.

In May of last year, the company posted sold third quarter results, this time up 10% year-over-year as earnings saw decent year-over-year growth as well, with the company announcing a $100 million buyback program in response to the results and softer share price. Over the summer, the company announced a 232nd consecutive dividend, albeit that a quarterly payout of $0.26 per share, or just over a dollar, was not too enticing. This was certainly the case in relation to the rapidly rising interest rate environment.

With fourth quarter sales growth slowing down to mid-single digits, full year revenues rose 12% to $735 million as operating earnings improved to $88 million, despite some charges take. Net earnings of $61 million worked down to earnings of $5.06 per share on a diluted count, more or less in line with expectations. This came as adjusted net income came in $10 million higher, nearly a dollar on a pre-tax basis. Net debt of $70 million was quite stable, as the company had been earmarking some funds to share buybacks.

In November 2022, the company posted first quarter results for the fiscal year 2023. Revenues of nearly $181 million were up 2% and change on the year before. GAAP earnings of $1.53 per share rose in a more pronounced fashion (with charges taken in the first quarter of 2022). Net debt inched up to $96 million, increasing a bit, but still very manageable, far below reported EBITDA.

Standex International Corporation guides for similar results in the second quarter as was the case in the first quarter, keeping the company on track of earning around $6 per share, aided by continued buybacks.

The company has been doing alright since March of last year as earnings power has risen from $5.50 per share to $6.00 per share, driven by a resilient performance and some share buybacks, reducing the earnings multiple to 18 times. Given the more uneven economic environment of higher interest rates, I am not too attracted to Standex International Corporation shares here.

Still Fair

While the Standex International Corporation stock move lower to the $80 mark last summer proved to be a decent entry point, it is the recovery of the shares which makes me quite cautious. The SXI shares appear to be fairly to fully valued here. This means that I see no reason to get involved with Standex International Corporation shares at this point in time, or at this level.

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