Colfax IPO Should Get Your Liquids Flowing

Colfax (CFX) is a supplier of pumps, specialty valves, and other fluid handling equipment.

All quotations are from the company’s most recent S-1 filing with links provided.

Business Overview (from prospectus)

We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves. We believe that we are a leading manufacturer of rotary positive displacement pumps, which include screw pumps, gear pumps and progressive cavity pumps. We have a global manufacturing footprint, with production facilities in Europe, North America and Asia, as well as worldwide sales and distribution channels. Our products serve a variety of applications in five strategic markets: commercial marine, oil and gas, power generation, global navy and general industrial. We design and engineer our products to high quality and reliability standards for use in critical fluid handling applications where performance is paramount. We also offer customized fluid handling solutions to meet individual customer needs based on our in-depth technical knowledge of the applications in which our products are used. Our products are marketed principally under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names. We believe that our brands are widely known and have a premium position in our industry. Allweiler, Houttuin, Imo and Warren are among the oldest and most recognized brands in the markets in which we participate, with Allweiler dating back to 1860.

Offering: 18.8 million shares at $15 - $17 per share. Net proceeds of approx. $111.3 million to be to repay indebtedness under credit facility, to pay dividends and bonuses previously declared.

IPO Underwriters: Merrill Lynch (MER), Lehman Brothers (LEH), UBS Investment Bank (UBS).

Financial Highlights:

Gross profit for the year ending Dec. 31, 2007 was $175,591 vs. $136,798 for the year ended Dec. 31, 2006…selling and g/a expenses were $98,500 for the year ending Dec. 31, 2007 vs.$ 80,103 for the year ending Dec. 31, 2006…R&D expenses were $4,142 for the year ending Dec. 31, 2007 vs. $3,336 for the year ending Dec. 31, 2006…EBDITA for the year ending Dec. 31, 2007 was $138,514 vs $29,627 for the year ending Dec. 31, 2006 (EBITDA includes legacy asbestos (income) expense of $(50,346), $33,816 and $18,112 for the years ended December 31, 2007, 2006 and 2005, respectively, and discontinued operations expense (income) of $1,397 and $(616) for the years ended December 31, 2006 and 2005, respectively.)

Top Competitors:

The markets we serve are highly fragmented and competitive. Because we compete in selected niches of the fluid handling industry, there is not any single company that competes directly with us across all of our markets. As a result, we have many different competitors in each of our strategic markets. In the commercial marine market, we compete primarily with Naniwa Pump Manufacturing Co., Ltd., Shinko Industries, Ltd., Shin Shin Machinery Group Co., Ltd. and Taiko Kikai Industries Co., Ltd. In the oil and gas market, we compete primarily with Joh. Heinr. Bornemann GmbH, Leistritz Pumpen GmbH, Netzsch Mohnopumpen GmbH and Robbins & Myers, Inc (RBN). In the power generation market, we compete primarily with Buffalo Pumps (a subsidiary of Ampco-Pittsburgh Corporation (AP)), KSB Group and Sulzer Ltd. In the global navy market, we compete primarily with Buffalo Pumps, Carver Pump Company, Curtiss-Wright Corporation (CW) and Tyco International, Inc (TYC).

Resources:

• Company website
• Online roadshow
• Economy-Finance: IPOVIEW-Colfax IPO may lack Visa’s Appeal, but promising
• Small-Cap Investor: IPO Watch: Colfax Corporation

Comments

[golds:]

CFX is a typical pump and dump. I bought this dog and was out the same day. I read the prospectus after I bought it (very very stupid). 1st time I have done this. I went with the summery info and the hype. Here is what I discovered.

The inclusion of a 50m dollar payment from their insurance company for an asbestos judgment reimbursement presented a misleading EPS. Also no place in the prospectus other than the exact income sheet do they reference net income. They speak of sales and gross income only due to the fact that the price the underwriters placed on the deal is not supported by real (future) net income. They have made significant improvements in their overall sales revenues by acquisitions (Q1 estimates don't show an increase for 2008) However, their debt has increased each year and if you remove the special insurance payments from their income statement you see that they earned around $30M for 2007 or yearly EPS of $0.70. (2004,2005 and 2006 are all less) The current asbestos asset on the balance sheet does not coverage asbestos liabilities. On top of all this negative information the owners are taking this opportunities to sell many of their shares (always a bad sign I would think).

1. Many asbestos claims (I think the word asbestos is used 20 times in the prospectus)

2. Their insurance company has not wanted to pay the claims and therefore they have had to sue their insurance company cost millions in legal fees.

3. The main venture capitalist gets to sell his shares at a huge premium paid for by the IPO (I think its around $65/share).

4. The companies real EPS for 2007 for real operations and including some onetime insurance settlement is around $30M or eps of $0.70.

5. Many other insiders sold there shares see Sec recent filings.

6. Company has only grown through acquisitions which means more debt to grow.

7. The company is not paying down all of its short and long term debt.

8. Most of the IPO proceeds go to insiders trying to jump out of this burning ship.


The only good thing about this company is that they provide a real product to a real market but with little profits for 2007 and no real growth for 2008 based upon Q108 sales estimates included in the Prospectus.

Additionally, they have unlimited asbestos liability.

Best of luck - short sell this dirty dog and get some of your money back !!!!!!

2008 May 12 02:26 PM

[thedivot:]

Hey Gold, I almost made the same mistake as you. I was going to invest until I read the prospectus and found the asbestos issue. Take that out and they made $0.40 a share giving a P/E of roughly 50. Kind of expensive for a 'boring' stock. Of course, last night Jim Cramer gushed all over this stock so it will likely go up in the short term. Maybe I should have bought anyway!

2008 May 13 07:53 AM

[golds:]

It's better to let some opportunities pass than put yourself in a highly risky position. I had just exited a position the day before and figured based upon the summary and the hype and the over sold nature of the IPO that I could grab a quick and small gain and be out. Today it is back up in the $22's based solely on Crammer's advise I would speculate. I have since done my homework as I typically do before entering a deal even for a small grab. This thing could go to $70/share but I personally don't see how and don't understand it. There exist many better deals than this one out there currently. The Rails brothers (the owners of CFX) have pieced this company together by acquisitions. Unfortunately they made some of the same mistakes I made by not doing there homework and ended up buying some entities with significant asbestos exposure which has killed the cash flow on CFX from 2003 till 2006. 2007 they received this big 50m reimbursement and decided it was time to get there money back. They currently have no downside with nothing in the deal but pure free equity thanks to the IPO.

Here is a better explanation that I dropped on Yahoo's Finance Board yesterday.

I may short this deal once I understand it better. More than likely I will leave it alone and go on to deals that I have a more complete understanding of.

>>>>>&g...

Here is what any Colfax investor should know.

Colfax has exposure to asbestos claims which its insurance company would not pay. This has been killing earnings for years. Over the years from 2003 to 2006 Colfax paid $100m for legal expenses and asbestos claims. This is not over. They still carry more claims than coverage.

After the IPO Colfax will still owe $246m in debt (loans). Most of the IPO proceeds go to pay off owners that are selling out. It was a very clever deal and the prospectus boarders on fraud in regards to novice investors.

Net earnings presented in the Prospectus are as follows:

2003 = EPS -0.52 (yes negative)
2004 = EPS -0.62
2005 = EPS -0.09
2006 = EPS 0.07 (first year of profit)

Just for perspective and your math I remind you that Colfax issued 40m shares or 43m with the green shoe (additional shares sold by the underwriter when a deal is hot). I am not sure how the deal got so hot other than hype created by a fake/misleading $1.79/eps for 2007.

Here is what 2007 earnings look like if you remove the 50m insurance reimbursement from there insurance company which has resisted paying until recently.

Sales 506m, CGS 330m, gen expenses 98m, R&D 4m,

$506-$330-$98-$4 = 74m Income before taxes and interest payments.

Subtract out 19m in interest payments (lets use 14m to reflect the re-payment of some debt)

$74m - $14m = $60m

Now subtract out corporate tax of 40% or $24m.

$60m - $24m = $36m (NET INCOME FOR 2007 !)

eps = net income / shares outstanding

EPS = $36m / 43m (or $0.84EPS.)

Thats pretty good but its not $1.79 eps.

.84 x 20pe = $16.80 per share. Low Range
.84 x 22pe = $18.48 per share. High Range

PE's were arrived at by comparing to FLS (competitor)

Nice job underwriters. Bad job investors.

If someone disagrees please make a positive case using income to show me why CFX is worth more.

Once again I am not short. This is my understanding of the deal but I am open to clarification.

Also Q1 estimates in the prospectus of $15m Gross income (not net income) including $3m charge for more asbestos claims.

They sold an old rusty Chevy with a new Mercedes price.


Sentiment : Strong Sell

2008 May 13 12:20 PM

[whats wrong:]

asbestos litigation is sure death. It caused fluor corp to go belly up during the peak of their hey days when they got involved with john mansville. It has taken fluor almost 20 years to recover

2008 May 13 04:17 PM

[thomas728:]

Mr. Gold,

Your analysis is pure "GOLD". All too many will simply "take a flyer"
thinking of nothing but someone else (CFX) doing the work as
they fall into a great space these days.

Many thanks and I would be further indebted if you cared to
share your latest ideas........

Prosper,

Tom Durkin / [e-mail]





Great work and many thanks....

2008 May 13 06:52 PM