Summary
- Colfax’s exit from volatile oil and gas business and entry into more defensive medical technology business has put it in a good position to weather the current coronavirus slowdown.
- Medtech segment was impacted by the postponement of elective surgeries during the early phases of Covid-19 and is expected to recover quickly as surgeons work through their backlogs.
- Fabrication technology might take a little longer to recover but the restructuring action will help its margins as volume come back.
- Stock looks attractive trading at 17.15x FY2021 EPS.
- This article was highlighted for PRO subscribers, Seeking Alpha’s service for professional investors. Find out how you can get the best content on Seeking Alpha here.
Colfax’s (CFX) business has transformed significantly over the past couple of years. The company has reduced its exposure towards the volatile Oil and Gas industry through sales of its Air and Gas, and Fluid Handling businesses. At the same time, it has entered the defensive and growing Medical Technology industry through the acquisition of DJO Global.
This transformation was crucial for Colfax. The company follows an acquisition-driven strategy where it acquires businesses at an attractive valuation and transforms them by reducing cost and improving their margin/growth profile. This is similar to the strategy which Danaher (DHR) follows and both Colfax and Danaher were founded by Rales Brothers. While management has always done a good job in terms of continuous improvement and taking cost out of Colfax's business, the volatility in the Oil and Gas business has overshadowed management’s good execution in the past. A decline in this end market has prevented Colfax's several past acquisitions from realizing expected synergy targets.
Management realized this issue and decided to reduce its exposure toward Oil and Gas end market and enter in healthcare space. This is the first down cycle management has seen post the transformation. While these are very different times and medical technology which is usually a defensive industry declined much sharply last quarter due to a halt in elective surgeries and medical procedures, the eventual rate of recovery will help investors better appreciate the strength of the company’s transformed portfolio.
So far, things appear to be going in the right direction. While sales of the company’s Medtech segment were down ~60% in April as the economy closed, they improved down sequentially to ~16% in June. For Q3, management is expecting flat to down mid-single-digit revenue and July sales were consistent with this trend. I expect a continued normalization as the year progresses and expect a good growth into 2021 as surgeons work down their backlogs.
