- The 13% drop in shares of Standex International make for an attractive buying opportunity.
- Look for a restructuring of food service operations to boost top- and bottom-lines later this year.
- Standex International is now in deep value territory based on several investment metrics.
- I see the company rewarding investors over the long-run with a higher dividend yield.
As an investor looking to gain exposure to a variety of industries across most of the developed markets, it's hard not to like Standex International (SXI). The company had some weakness in its top segment, but the long-term growth story looks to be intact, making the 13% fall in the stock price year to date enticing from a valuation angle.
Standex posted earnings of $0.96 a share for 4Q, missing consensus by 8%. This comes as the company saw soft demand in its top segment, food service. Food service brings in over 55% of its revenues. Driving the food service business down was weakness in its U.K. grocery store and U.S. convenience segments. However, its other segments were fairly strong, including engraving, electronics and hydraulics.
Rightsizing food service with restructuring and new products
On the other hand, Standex is right sizing its food service business with restructurings and taking out unnecessary additional costs out of its business. Its lower cost structure should help boost EPS over the interim.
Plant closures are the quickest and easiest mechanism in the restructuring process. Standex has already shutting down its Cheyenne Cooking Solutions facility. The move should be done within the next two quarters, ultimately saving $4 million a year in costs. As far as improving its cost structure. Standex is moving some of its product operations to Mexico for the lower hourly cost and lower fixed overhead.
Other areas can make up the slack
We're already two quarters into fiscal 2014, but food service may well remain weak for the second half of 2014. Yet, its multi-year initiatives remain in place and should drive profitability over the long-term. Until food service starts to see top-line growth and margin expansion, I look for Standex's other areas to pick up the slack.
Engraving saw all-time quarterly sales and profitability during 2Q. Sales were up 20% year over year, and operating income rose 30%. All of its geographic regions performed. Its space sales were up double digits during 2Q, with notable orders from NASA.
I'm also encouraged by Standex's ability to gain more exposure to the oil and gas industry. Standex just gained its first development order from a third original equipment manufacturer in the oil and gas industry, where it had previously been focused on just two. With the U.S. focused on energy independence, I see this segment as an attractive growth area for Standex.
Standex also has exposure to other key markets that are getting a boost from the rebounding economy. The first is aviation and aircraft, where the company is making progress in jet engine components. The second is auto, where Standex's products are used in hydraulic oil pressure sensors.
I look for its hydraulic segment to continue seeing sales growth, up 12.4% Y/Y in 2Q. This should come as the company sees a pickup in North American construction and the dump truck market expands. As well, sales of dump trailers to the oil and gas market should pick up.
The overlooked growth opportunity in food service
I believe one of the biggest opportunities for Standex that's overlooked is its exposure to the fast growing dollar store market and quick service restaurant space. As we get some traction in the economic rebound, there should be an increased level of demand for food service equipment as more stores open across the retail space. One of the big benefits to operating in the food service space, is that everyone has to eat.
The other growth lever is entering the fast growing dollar store segment, with the likes of Dollar Tree and Dollar General increasing their number of freezer and coolers. One of Standex's newest products includes a new line of upright merchandising cabinets. These items appear to be having some initial success. Dollar General, the leader in the dollar store arena, has over 11,000 stores, but it is showing no signs of store opening slowdown. During the first nine months of 2013, they opened more than 500 new stores, and in fiscal 2014, they are looking to open another 700 stores.
Technology changes further drive the top-line
They have to do something with their strong balance sheet, with one of the best options being investment in technology innovations. Standex's net cash-to-capital position is 0.6%, while during 3Q it had a net debt-to-capital position of 9.8%. For a company that's highly technical, investing in technology can have a meaningful impact on improving margins and boosting operational efficiencies.
Just a couple examples of how Standex is increasing its productivity via technology includes its chest style refrigeration line, operating at 80 below Fahrenheit. The ultra-low refrigeration is seeing a big increase in adoption by drug companies for maintaining biological and genetic samples, as well as blood/tissue inventories.
Speed and convenience are increasingly important and that's where Standex's cooking solutions come into play. Standex has a new speed oven for faster cooking. This means being able to cook a frozen pizza in a matter of minutes. There's a big growth opportunity there for the company. We look for these innovations and others to help drive incremental value over the interim.
Shares remain cheap
Assuming Standex continues to deliver strong top line growth, Standex is a solid play on the world's continued need for food. In truth, it's a play on the continued success of the broader economy, with exposure to a number of industries. Using a long-term free cash flow growth rate of 3%, which is half its historical average, and a 10% discount rate suggests a fair value of $68. Re-valuing Standex at its historical price-to-earnings average multiple yields a price target of $60.
Its PEG ratio is a fairly low 0.9 and Mr. Market appears to be underestimating the company's ability to expand margins, putting the company in deep value territory. Restructuring and new growth products, should help the company beat market expectations going forward.
Source: Yahoo! Finance
As you can see, Standex is cheapest based on earnings, book value, and EV/EBITDA.
For investors looking to gain exposure to several different industries, Standex presents a compelling opportunity. With shares off over 13% YTD, this is a great pullback for long-term investors. I also see investors being rewarded with a higher dividend yield as the current payout is only 10% of earnings. All in all, Standex represents a great bargain in today's market.