2023-11-21 05:16:12 ET
Summary
- IDEX Corp. has seen a decline in operating momentum, with negative organic growth and slower orders in the second and third quarters.
- The company operates in mission-critical niches, delivering industrial and technology solutions to various industries, backed up by a very strong track record.
- Despite recent acquisitions and a strong long-term performance, the premium valuation and declining performance make the shares less appealing.
This summer I called IDEX Corp. (IEX) a dealmaking machine at work. The company saw continued operating momentum, successfully combining organic growth with bolt-on dealmaking, meaning that there was much to like about the shares, except for a premium valuation.
Since the summer, IDEX has been hurt by slower operating momentum, with second and third quarter orders coming down, as organic growth turned negative. With shares trading at similar levels today as June, appeal has greatly diminished in my eyes, as I am still taking a very cautious stance here.
Mission Critical Niches
IDEX is a supplier of highly engineered industrial and technology solutions, often applied to mission-critical niches, with the obtained competitive moats acting as a base for the outperformance of the business and shares.
Decentralized management teams are given freedom to operate, with activities being spread across many industry verticals, such as fire & safety, energy, life science, pharma and analytical instruments. In these segments, IDEX delivers fluid and metering technologies, dispensing equipment and related products which are distributed to OEMs and customers directly.
This strategy has been the driver behind a great long term performance with a $10 stock in the year 2000, having risen to $170 pre-pandemic early in 2020. Shares rallied to a high of $240 in 2021 and traded around the $200 mark in June of this year.
Putting these valuations into perspective, 2021 sales rose 18% coming out of the pandemic to $2.8 billion, with adjusted earnings reported at $6.30 per share. Amidst a relative modest net debt load, more organic growth and post-pandemic recovery, further growth was seen in 2022, aided by an EUR 700 million deal for Muon Group. This made that full year sales rose another 15% to $3.18 billion.
Operating profits for 2022 came in at $751 million, as fat margins resulted in adjusted earnings of $8.12 per share. Net debt of just over a billion was no issue with EBITDA reported at $884 million, for a leverage ratio of just over 1 times.
The company guided for much more modest achievements in 2023, with sales seen up 1-5% and adjusted earnings seen at $8.50-$8.80 per share, although the midpoint for earnings was cut to $8.40 per share after the release of the first quarter results.
Trading at 24 times earnings and commanding a $16 billion enterprise valuation, the company announced a CAD 150 million bolt-on deal for Iridan Spectral Technologies, marking a truly bolt-on deal. With the company trading at 24 times earnings in a higher interest rate environment, while operating momentum was cooling down, I did not see appeal for the shares in June, as instead I hoped for an entry point around $170 as a better opportunity.
Back To Square One
Since June, shares of IDEX have actually risen to the $230 mark over the summer. Shares fell to the $185 mark in October, before now rebounding to $198 per share.
In July, second quarter sales were reported up 6% to $846 million, with adjusted earnings up 8% to $2.18 per share. Despite the fact that revenues still grew, the company issued a big profit warning with inventory and backlog being recalibrated among customers, notably in health & science, with no recovery seen this year anymore.
The company guided for a small decline in full year organic sales, with adjusted earnings now seen down to $7.90-$8.00 per share. Evidence for the shortfall was already seen by a $766 million order intake in the quarter, for a book-to-bill ratio which comes in far below 1 times, in fact at just 0.91 times.
In October, IDEX posted a 4% fall in third quarter sales to $793 million, with organic sales down as much as 6%. This led to adjusted earnings falling a percent to $2.12 per share. Despite the fact that adjusted sales for the year are still seen down 1-2% for the year, adjusted earnings are now seen up to $8.13-$8.18 per share. Momentum is quite soft, with order intake of $712 million down 9% on the year before, trailing reported revenues in a big fashion with the book-to-bill ratio posted at 0.90 times.
Net debt has already come down to $760 million, but with adjusted EBITDA trending over $900 million per annum, leverage is far from an issue here. In fact, leverage was coming down a bit further as the company sold Micropump in a $110 million deal in August, pushing down pro forma net debt to $650 million.
Another Deal
Just a couple of days after the release of the third quarter results, IDEX announced a $206 million cash acquisition of STC Materials Solutions. The company acquired this advanced materials science solutions business, a producer of technical ceramics and hermetic sealing solutions. With a $50 million sales contribution, the company is paying a 4 times sales multiple, with margins reported alike those of IDEX.
In comparison, IDEX commands a near $16 billion enterprise valuation here which is equivalent to about 5 times sales, making the deal look relatively cheap. Nonetheless, it is a drop in the bucket, with both the deal tag and sales contribution both slightly surpassing the 1% mark here.
And Now?
The truth is that I am much more cautious at $200 than I was in June, as the performance in the second half of this year is rapidly coming down, as even some bolt-on dealmaking simply will not alter the situation. IDEX remains a great long term value creating play, but simply trades at quite a rich valuation here, in my view.
This makes me quite cautious here, in fact more cautious than I was in June, making me place the shares on the watch list, with no intention to get involved anytime soon here.
For further details see:
IDEX Corporation: Long-Term Value Creator Is Struggling Here