Investors in Standex (NYSE:SXI) have been pleased with the progress the business continues to make. Towards the end of August, the company posted its fourth quarter results for the year, demonstrating healthy growth.
The diversified business model, strong margins, anticipated further growth and strong balance sheet all drive appeal as shares trade just a little bit above the average market valuation multiple.
As such I am actually quite upbeat about the prospects for the shares on dips.
Fourth Quarter Headlines
Standex posted fourth quarter sales of $197.3 million, a 12.2% increase compared to the year before. Sales came in far ahead of consensus estimates at $175.8 million, although the stock is thinly covered by analysts.
The company posted net earnings of $10.0 million, which is a 19.6% decrease compared to the year before. The reason for the fall in earnings are a myriad of one time items hitting the bottom line including restructuring charges.
All in all diluted earnings fell to $0.79 per share on a GAAP basis. Adjusted non-GAAP earnings came in at $1.24 per share, beating consensus estimates by twelve cents.
Solid Growth, Earnings Impacted By One-Time Items
CEO David Dunbar was happy with the double digit sales growth and organic growth which exceeded the underlying market growth. Dunbar stresses that 11.2% of the reported sales growth came from organic growth with acquisitions and favorable currency movements adding just a percent of topline sales growth.
The company operates five major business units of which the food service equipment segment is by far the biggest. This unit posted sales of $106.3 million, which is a 11.1% increase compared to last year. Margins fell to 10.9%, which is down by 20 bias points compared to last year. Growth was driven by the new lines of products as well as pent-up demand from the difficult first quarter.
All of Standex's other businesses are much smaller in terms of sales, but they show superior operating earnings. Engraving sales rose by 26.8% to $28.6 million as operating margins totaled 19.6% of revenues. The company's mold technology is in real demand, especially in the automotive sector as the company continues to focus on growth in this business.
More modest revenue gains were made at the engineering business with sales increasing by 5.6% to $22.7 million as margins came in at 16.9%. Orders in the space market in which the company is a supplier to Boeing, Lockheed Martin and Virgin Galactic were behind the growth in sales.
Sales of electronics products rose by 7.4% to $29.6 million as margins improved to more than 16% of sales. The smaller hydraulics product business posted sales of $10.1 million which was a 18.4% increase compared to last year as operating margins improved to 20.1% amidst the continued recovery of the US construction sector.
A string of one-time items hurt earnings for the quarter including $4.2 million in restructuring charges, and $0.4 million in transition and acquisition-related expenses. This was partially offset by a $1.5 million gain from insurance proceeds.
At the end of the quarter, Standex held some $74 million in cash which combined with a total debt load of about $45 million results in a net cash position of about $30 million.
At the moment Standex has about 12.5 million shares outstanding, which at $74 per share values the business at $925 million, or operating assets closer to $900 million.
For the entire year, Standex posted sales of $716 million as it reported GAAP earnings of $3.89 per share. Non-GAAP earnings which exclude restructuring costs in particular rose to $4.22 per share.
This values operating assets at 1.3 times annual revenues, 17 times non-GAAP earnings and 18-19 times GAAP earnings.
History Of Modest Growth
Over the past decade the company has grown its sales by a cumulative 50%, or by about 4% per annum. Yet for a long time sales have been very stagnant, especially in the period of 2005-2011. Earnings have steadily improved over time as the company managed to keep the outstanding share base rather stable.
One thing to notice, after running a net debt position of over the hundred million mark a decade ago, the company now has access to a modest net cash position.
Standex is working on a nice strategy owning high-margin businesses in industrial niche markets. This diversification, the high margins and strong balance sheet allow for further growth. In recent years the company has already made numerous smaller deals and amidst a small net cash position there is certainly more financial capacity to do future deals.
These deals are being complemented by targeted strong organic growth which the company aims to achieve through ¨customer intimacy¨ as it partners, solves and delivers on solutions and products with its clients. For the longer run, the company targets sales growth of 2-3% based on anticipated GDP growth, aided by 3-4% growth resulting from acquisitions.
As such the business trades at roughly market-equivalent multiples while it already has demonstrated multi-year momentum amidst structural improvements. From their lows of $10 during the recession shares have risen to fresh all time highs around $75 currently. It most be said that shares have been trading a few bucks higher earlier this summer.
So far this year shares are up some 20%, after trading as low as $55 in February. I must say that I like the business at around 16 times GAAP earnings which is at par with the valuation of the wider market, and translates into a $65 entry target. The solid growth, fine strategy and strong balance sheet should allow for the appeal versus the market at those levels.
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