2023-08-17 11:37:58 ET
Summary
- Idex Corp. is a mid-cap industrials firm operating in fluid and metering technologies, health and science technologies, and fire and safety/diversified products.
- The company's steady revenue growth and diversified portfolio make it an attractive choice for a tortoise-style investor.
- Idex Corp. has a strong financial performance, with consistent revenue growth, returning capital to shareholders, and expanding profit margins.
Introduction
Often in life, I reflect back on the decisions I've made, the paths I chose, and how I've gotten to where I am today. As I was thinking back, it occurred to me that some of the lessons I learned in early childhood were still some of the most important for my life now, even as an adult.
One story, in particular, comes to mind: The Tortoise and the Hare. I'm sure the vast majority are familiar with this old tale, but how many of us chose to invest like the tortoise, and how many chose to invest like the hare?
Speaking for myself, I can tell you, it's exciting to try and be a "hare", always chasing that next big thing, that one idea that will let you put work behind you and settle down, sipping mimosas and golfing. Alas, it's merely a mirage.
When I first started investing, I did not understand that the mindset of the hare often stands in direct opposition to our investment goals. The constant chasing of penny stocks which could move from $0.01 to $0.10, while fun, is a distraction from the mission.
So How Might the Tortoise Invest?
The tortoise on the other hand would gravitate towards index funds and blue chip companies, those companies with a storied operating history, predictable cash flow, and sustainable competitive advantages. Once the tortoise identifies those companies, he or she would simply sit down and wait, slowly adding to those positions over time.
On that note, today I'd like to discuss a company a tortoise-style investor might find attractive: IDEX Corporation ( IEX ).
Within this article, I'll provide an overview of IDEX Corp., and explain to you why I believe this company to be a decent choice for an investor looking to emulate a Tortoise-style investment strategy.
Overview
IDEX Corp. is a mid-cap industrials firm operating across three main categories: Fluid and Metering Technologies, Health & Science Technologies, and Fire and Safety/Diversified Products.
For the tortoise-style investor, diversification ought to be music to one's ears as it helps reduce the exposure to the cyclical demand in the industrials industry. On top of that, it helps that the verticals they have exposure to are quite strong.
Fluid metering, which serves companies in both the oil and water industries, is supported by an increased focus worldwide on maximizing the efficient use of our resources. The Health & Sciences vertical benefits from the aging of our global population, which has resulted in societies looking for more healthcare breakthroughs that utilize fewer resources. Fire and Safety play an important role too as natural disasters are quick to remind us of the importance of continued investment in these products and services.
Looking beyond the business as it exists today, to support its long-term growth objectives, the company is known to acquire competitors from time to time as it did in April this year with its acquisition of Iridian Spectral Technologies for CAD150M. Iridian designs and manufactures thin-film, multi-layer optical filters for laser communications, telecommunications, and life sciences markets. While this acquisition does not radically transform the company, it doesn't need to, it's just another lever that IDEX pulls to continue driving the growth engine.
Financials
Revenue
The benefits of their approach can be seen above through its smooth, consistent revenue growth. Similarly, as you can see, despite the dot-com bubble, the great financial crises, COVID-19, and the supply chain crisis, IDEX continued to perform and revenues grew in a linear fashion.
It's sustained growth like this which can give the tortoise investor confidence in the long-term trajectory of the company. But that's always easier said than done. During each of those aforementioned slowdowns, you could have found a company grow faster and garner more share price appreciation (we all remember Zoom in 2020-2021). It's exciting to be the hare, it's hard to be the tortoise.
Returning Capital to Shareholders
With its predictable business model, IDEX is able to more easily forecast capital requirements, which frees up more cash that can be distributed to investors. While I often prefer the companies I'm invested in to reinvest their cash flow instead of returning it to me, it can help provide reassurance to investors holding for the long term as they are able to reap the benefits of their investment without selling (a big plus if one expects to hold for over a decade).
Over the past decade, IDEX has more than doubled its dividend while reducing the overall share count from over 80M to 75.6M. Hard to complain about that!
Margins
While gross margins have remained relatively flat, hovering around 40%, operating and net profit margins have expanded significantly. This speaks to the strength of their M&A strategy whereby they acquire companies and are able to achieve operation efficiencies through the use of shared services (accounting, IT, and HR for example). It also indicates that the company is not interested in acquiring growth at any cost.
The effectiveness of IDEX's M&A team is further evidenced by their consistently strong returns on invested capital. Over the past 10 years, they've earned an average return of 12% on their invested capital and more recently they earned 13%+. This passes my benchmark of 10% which reflects the average return of the US stock market over long periods of time.
Greatest Risk: Valuation
From my perspective, the greatest risk prospective investors face when contemplating an investment into IDEX is its valuation. At 27.5x forward earnings and 5x forward revenue, it's hard to call this company cheap. While these metrics are roughly in line with its historical average over the past 10 years, they are significantly above the overall market as well as many industrial peers.
That said, at least IDEX trades at a more reasonable valuation compared to its peer, Badger Meter ( BMI ) which trades at more than 50x forward earnings. For those interested in learning more about Badger Meter, I would refer you to my prior article on the company.
Conclusion
Reflecting on the timeless lessons of the tortoise and the hare, IDEX Corporation embodies the tortoise's approach in the investment world. With a diversified portfolio spanning fluid handling, health and science, and safety products, IDEX maintains steady revenue streams even amid economic shifts. Acquisitions, such as Iridian Spectral Technologies, exemplify strategic growth, echoing the tortoise's methodical progress. Its stable financials, dividends, and operational efficiency showcase a commitment to sustained, reliable expansion.
For the long-term tortoise-minded investor planning to hold a company over many decades, valuation is less of a concern. This is not to say that the valuation does not matter, but that over the long term, dollar cost averaging and time in the market can help to correct for poorly timed purchases.
I rate IDEX Corp. a Buy.
Thank You
Dear reader, thank you for taking the time to read my latest article and for your support. Engaging with you readers is my favorite part about writing these articles, so if you'd like to discuss anything mentioned please feel free to comment below. Have a great day!
For further details see:
IDEX: Slow And Steady Wins The Race