On May 1, Bill Simpson wrote an analysis of Colfax (NYSE:CFX). In its May 8 IPO, the company priced 18.75 million shares at $18 a share, above its $15-$17 range, raising $338 million. Tuesday the stock closed at $22.07.
The text of Mr. Simpson's original writeup follows:
• • •
Colfax plans on offering 18.8 million shares at a range of $15-$17. Insiders are planning on selling 11 million shares in the deal. Merrill Lynch, UBS and Lehman will be lead managing the deal; Robert Baird, BofA, Deutsche Bank, and KeyBanc will be co-managing. Post-ipo CFX will have 41.2 million shares outstanding for a market cap of $659 million on a price of $16. Approximately 1/3 of ipo monies will be used to repay debt, 2/3 will go to insiders in the form of bonuses, dividends and reimbursements.
Capital Yield Corporation will own 21% of CFX post-ipo. Capital Yield is the selling shareholder on ipo.
From the prospectus:
'We are a global supplier of a broad range of fluid handling products, including pumps, fluid handling systems and specialty valves.'
CFX specializes in rotary positive displacement pumps. What is a displacement pump? According to wikipedia it is a pump that causes a liquid or gas to move by trapping a fixed amount of fluid and then forcing (displacing) that trapped volume into the discharge pipe.
The key to this ipo is CFX end market segment users which include commercial marine, oil and gas, power generation, global navy and general industrial. From previous ipo pieces we know that the next few years will bring unprecedented new ship builds spurred by commodity demand in places such as India, China and Brazil. Similarly, the historical high oil and gas prices have spurred exploration, which means more equipment is needed. Power generation infrastructure around the world is also in need of massive upgrades due to age and inefficiencies. CFX's end markets look solid even in a slowing world economy.
Pumps are marketing under the Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and Zenith brand names.
CFX has production facilities in Europe, North America and Asia. Asia production facilities include operations in both India and China. Products are sold through 300+ person direct sales team and more than 450 distributors in 79 countries. 67% of 2007 revenues were derived outside the US with no single customer accounting for more than 3% of revenues. Customers include Alfa Laval, Cummins, General Dynamics, Hyundai Heavy Industries, Siemens, Solar Turbines, Thyssenkrupp, the U.S. Navy and various sovereign navies around the world.
CFX has a large installed product base which leads to significant aftermarket sales and service revenues as well as eventual recurring replacement sales. In 2007, 25% of revenues were derived from aftermarket sales and service.
Pumps (including pump aftermarket sales/service) account for 85% of revenues.
The worldwide pump and valve sector is highly fragmented. CFX believe their sector is ripe for consolidation and they've made numerous acquisitions and plan on making more in the future. Recent acquisitions include Zenith Pump in 6/04, Portland Valve in 8/04, Tushaco Pump in 8/05, Lubrication Systems in 1/07, and Fairmount Automation in 11/07.
A quick look at CFX end markets:
Commercial Marine/Naval - Fuel oil transfer; oil transport; water and wastewater handling
Oil and Gas - Crude oil gathering; pipeline services; unloading and loading; rotating equipment lubrication; lube oil purification;
Power Generation - Fuel unloading, transfer, burner and injection; rotating equipment lubrication;
General Industrial - Machinery lubrication; hydraulic elevators; chemical processing; pulp and paper processing; food and beverage processing.
Looking ahead - In their S-1, CFX exudes a confidence in 2008 that is rarely seen in ipo filings. To quote from the S-1: 'We believe that we are well positioned to continue to grow organically by enhancing our product offerings and expanding our customer base in each of our strategic markets. During 2007, we experienced strong demand in the majority of our strategic markets, and we expect favorable market conditions to continue throughout 2008.'
CFX sees growth coming from the following core markets:
1) In the commercial marine industry, CFX expects growth in international trade and high demand for crude oil to continue to create demand for container ships and tankers;
2) CFX expects activity within the global oil and gas market to remain favorable as capacity constraints and increased global demand keep oil and gas prices elevated;
3) In the power generation industry, CFX expects activity in Asia and the Middle East to be robust as economic growth continues to drive significant investment in energy infrastructure projects;
4) In the global navy industry, CFX expects that sovereign nations outside of the U.S. will continue to expand their fleets as they address national security concerns. In the U.S., Congress is expected to continue to appropriate funds for new ship construction for the next generation of naval vessels as older classes are decommissioned;
5) In the general industrial market, CFX expects that the continued economic development of regions throughout the world will continue to drive increased capital investment and will benefit local suppliers as well as international exporters of fluid handling equipment.
Asbestos - Two of CFX subsidiaries have substantial asbestos liability. CFX took an asbestos related charge annually from 2003-2006 averaging $25 million annually. They took the charge because one of their primary insurance carriers claimed it had exhausted resources to pay further asbestos claims. This changed CFX liability and they took a charge annually to include this increase in liability from the insurance carrier to CFX itself. In 2007, CFX actually gained approximately $50 million on the asbestos expense line thanks to a settlement with said insurance carrier. CFX will continue to book a gain or loss on annual earnings as their asbestos liability estimates shift. It appears that CFX may book another asbestos related accounting gain in 2008 as they continue to factor in less liability due to insurance settlement.
Currently on the balance sheet, CFX lists $376 million in asbestos liability with $305 million in insurance coverage for said liability. It appears CFX took on their insurance carriers and won. Barring a change in the 2007 settlement, I would expect minimal additional asbestos charges for CFX going forward. As such I will be folding out asbestos charges and gains from earnings and projections.
Assuming the financials appear promising, CFX looks to be a very nice way to play the Asian growth engine. Looking at their core markets, my first thought was that CFX is positioned very nicely. Reading the prospectus, it is clear CFX feels the same as they essentially come out and write in an SEC filing that they fully expect strong growth to continue in 2008.
$168 million in debt post-ipo. While not enough to derail operations, I would rather have seen insiders hold off on selling in this deal to allow CFX to repay more debt. CFX plans on acquiring companies going forward and a cleaner balance sheet would make those acquisitions far more accretive. In addition to the debt, CFX will have nearly $50 million in cash on hand post-ipo. I'd expect CFX to utilize this cash for future acquisitions. Overall for a company that has been rather aggressive in acquiring over the past four years, the balance sheet here is in decent shape.
Revenues grew steadily from 2003-2006 and exploded in 2007. Revenues were $345 million in 2005, $394 million in 2006 and $506 million in 2007.
Gross margins were 36% in 2005, 35% in 2006 and 35% in 2007. In 2007 CFX was able to grow revenues by 28% while maintaining gross margins. Approximately 50% of that growth was organic from existing business with the remainder from acquisitions and currency benefits.
2007 - Revenues were $506 million, a 28% increase over 2006. Gross margins were 35%. Operating expense ratio was 20%. Operating margins were 15%. Plugging in interest expense and full taxes, net margins were 7.5%. Earnings per share were $0.90. On a pricing of $16, CFX would trade 18 X's 2007 earnings. Note: Preceding numbers take into account debt paid off on ipo and fold out the $50 million in asbestos accounting gains for reasons noted above.
2008 - In the current S-1, CFX has preliminary first quarter revenue and operating earnings numbers. Operating margins were a bit light but there was no breakout of expenses, so I'm going to assume there were some asbestos accounting charges in those numbers. We'll know more when CFX officially releases first Q '08 results. I'm going to be slightly conservative in projections, however, based on the lower operating margins in first quarter 2008. Based on first quarter numbers and CFX's own enthusiasm for 2008 growth, I believe CFX can grow revenues 10%-15% in 2008. Assuming slightly lower operating margins, net margins should be in the same 7.5% ballpark due to lower debt servicing to revenue ratio. Earnings per share should be $1.05. On a pricing of $16, CFX would trade 15 X's 2008 earnings.
Conclusion - Very solid ipo. Too often this type of industrial solid cash flow business has come public laden with LBO debt. That isn't the case here. Yes, insiders could be selling less stock to allow CFX to pay off more debt, but the balance sheet here is in solid shape. Ideally I'd like to see all debt wiped off on ipo instead of 25%-30%. The ipo driver here is the current boom in worldwide shipbuilds, oil & gas equipment manufacturing and power infrastructure. These three sectors look to continue to grow strongly over the next 3+ years with much of that growth coming outside the US. CFX is positioned perfectly for that growth and 15 X's 2008 earnings is a very reasonable multiple here. Definite recommend in range and a bit above, I like this ipo.