For Colfax, Breaking Up Looks Like A Value-Creation Opportunity

 

I’ve been lukewarm on Colfax (CFX) for a while now, and I don’t really feel like I’ve missed out on much. The shares have basically kept pace with the broader industrial space since my last write-up, while names I preferred like Eaton (ETN), ITT (ITT), and Parker-Hannifin (PH) have done better, and the longer-term results (annualized returns over the last five and 10 years) are likewise substandard.

Now there’s another twist in the Colfax story, with management deciding to split the company apart. Given the different needs and demands of the two businesses (MedTech will need more R&D and M&A investments, as well as more working capital), it makes sense and there’s definitely positive attributes to both businesses – including a welding business that has been outperforming Lincoln Electric (LECO) recently.

As far as valuation goes, though, my feelings are mixed. My 2023-2025 revenue and FCF estimates are higher than the Street now, but that’s not really enough to drive a stand-out valuation. Valued on a sum-of-the-parts basis, though, I can see an argument for a fair value above $50, with a lot riding on what MedTech can achieve in terms of top-line growth.

 

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For Colfax, Breaking Up Looks Like A Value-Creation Opportunity