IDEX Rightly Appreciated For Its Excellent Credentials And Advantageous Market Exposures

I've talked about IDEX (NYSE:IEX) as a "best of breed" industrial in the past, and I continue to believe this is one of the best-run and best-positioned industrials out there. Management has shown that they can not only optimize operations but also execute successfully on tuck-in/bolt-on deals that build on existing strengths.

Since my last update, this has been one of the strongest stocks among the industrials I follow, with the shares up almost 25% and beating flat performance for the larger multi-industrial group, as well as other high-value "compounder" industrials like Ametek (AME), Danaher (DHR), Fortive (FTV), Nordson (NDSN), Rockwell (ROK), and Roper (ROP). This outperformance has been well-founded, with strong double-digit revenue growth and healthy margins, as well as broad-based strength in the business.

Valuation is my biggest issue. I realize some investors believe in buying quality and holding on irrespective of valuation, but I think entry prices matter, and it's tough to see how IDEX is substantially undervalued even given above-average growth potential in the coming years.

 

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IDEX Rightly Appreciated For Its Excellent Credentials And Advantageous Market Exposures

Margin Headwinds Chipping Away At IDEX's Premium

 

Writing about IDEX (IEX) in August I said that this manufacturer of "best of breed" fluid management equipment was one that "I'd love to get a crack at a more reasonable valuation". With the market now quite a bit more concerned about supply chain and cost challenges in 2022, and maybe also more concerned about the durability of the cycle, the shares have declined about 12% since that last update.

Is IDEX cheap enough now? Not really, but it's close, and sometimes "close" is the best you get when it comes to the really well-run companies. Mid-single-digit long-term revenue growth (around 4% organic, augmented by 200bp of M&A) and high single-digit FCF growth can support a long-term annualized total return in the high single-digits, and that's very tempting. By the same token, though, I do see sector-wide risks that 2022 estimates could be too high and investors can be brutal once they deem a trend to be over.

 

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Margin Headwinds Chipping Away At IDEX's Premium

IDEX: Improving Macro And Capital Deployment, But Not Much Share Price Momentum

 

Despite a broad recovery underway in many markets, IDEX (IEX) shares have stalled out a bit. Just barely up since my last article, IDEX has modestly lagged a sluggish industrial sector. A few other high-multiple compounders like AMETEK (AME) and Fortive (FTV) have seen similar results, but then Danaher (DHR), IMI plc (OTCPK:IMIAF), and Roper (ROP) have marched merrily onward, so I don’t think there’s any broader conclusion.

This remains a stock that I’d love to get a crack at at a more reasonable long-term valuation. The best I can say about the shares now is that there are plenty of industrials that offer similar lackluster long-term prospective returns and IDEX is a better company than many of them. I realize there’s always going to be an “ignore the valuation and just buy” contingent, and I do like the long-term prospects for this best-of-breed fluid management company, but the valuation still doesn’t really appeal to me now.

 

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IDEX: Improving Macro And Capital Deployment, But Not Much Share Price Momentum

Still Waiting For A Better Entry Point On IDEX

 

I don’t expect the shares of quality companies to go on sale that often, and I do regard IDEX (IEX) as a “best of breed” player in fluid management, with an asset-light model focused on multiple smaller businesses that are leaders in their markets by virtue of differentiated product design and capabilities. Likewise, the company’s 20%-plus operating margins and long track record of healthy ROICs speak for themselves.

I have no issues with the quality or growth potential of IDEX, but I am a firm believer that overpaying for even the best companies is a ticket to long-term underperformance. Since my last update, these shares have continued to rise (up another 18%), but lagged the broader industrial group by around 10%, as well peers like IMI plc (OTCPK:IMIAY) (OTCPK:IMIAF), and the valuation is still no bargain.

High single-digit FCF growth isn’t enough to support a particularly attractive return, and I’d likewise note that the P/E has crept up to a 50% premium over the S&P 500 (the high end of the historical range), while the P/E of the S&P 500 itself is close to 50% above its long-term average. None of that precludes further gains for IDEX, but I do worry about the inevitable normalization of valuations across the industrial sector (and the market as a whole).

 

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Still Waiting For A Better Entry Point On IDEX

IDEX Priced As The High-Quality Growth Fluid Control Story That It Is

Quality fluid control/fluid management stocks don’t often trade all that cheaply, and that’s just a fact of life in the market today. You can look at a diverse group of peers and comps for IDEX (IEX) and, for the most part, if you see an undervalued name, it’s likely because the company has outsized exposure to oil/gas and/or power gen and not as much exposure to short-cycle industrials and biopharma. So, as a high-quality name in a still-popular space, I’m not that surprised that IDEX has continued to outperform the broader industrial group since my last update, particularly as the company has taken some aggressive cost reduction moves to mitigate decremental margin pressure.

I’m comfortable with a double-digit FCF growth outlook for IDEX, with growth opportunities in life sciences and photonics offsetting some longer-term pressure in oil/gas. Short-cycle leverage here is more mixed; autos, ag, and “general industrial” should be getting better, but aerospace, oil/gas, power, and chemicals could drag on results a little longer.

Are IDEX shares cheap? Nope. Would I expect them to be? Not really, particularly with management doing a pretty good job of mitigating COVID-19-related pressures. I do still think that valuation always matters sooner or later, and I’d rather wait for a pullback than chase a name offering what appears to be mid single-digit long-term total annualized appreciation potential.

 

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IDEX Priced As The High-Quality Growth Fluid Control Story That It Is

IDEX Corp: A Best-Of-Breed Process Tech Player

The CEO of one of the med-tech companies I covered as an analyst was fond of saying, “The bigger they are, the harder they hit,” when explaining why he steered his company into defensible niches largely ignored by large players, and that is largely the approach taken by IDEX (IEX) in its process technologies business. Despite competing in a wide range of “typical” process industry end-markets, IDEX has focused on pumps, meters, precision fluidics, dispensing equipment, and clamps that occupy highly-defensible, mission-critical slots in segments that don’t attract competitive attention from mega-cap rivals.

I continue to love IDEX as a business, but the valuation is problematic even if you believe that U.S. markets are going to return to growth in 2020. While I am very bullish on the long-term outlook for the company, and acknowledge that I may be underestimating future contributions from M&A, it’s tough to make the numbers work as they are, and so this occupies a spot high on my watch list for now.

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IDEX Corp: A Best-Of-Breed Process Tech Player

ITT Overlooked And Undervalued As A Late-Cycle Play

I'm not sure it's entirely appropriate to call a stock followed by over a dozen sell-side analysts and widely-owned by institutions "overlooked", but I don't get the sense that ITT (ITT) is as widely-known among investors as it should be. And, that's a shame. ITT isn't perfect, but I like this diversified industrial's philosophy of adopting best practices irrespective of their source, not to mention broad late-cycle exposure and a strong growth auto business.

Below the mid-$60s, I think ITT is undervalued. While there is some asbestos liability here, I believe it is well-covered, and the company has the dry powder available to make select acquisitions to build out its operations further. I believe the perception of the auto business has already corrected, and ITT's short-cycle industrial exposure is moderate, and so I believe this is a good time and place to consider this name.

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ITT Overlooked And Undervalued As A Late-Cycle Play

Ongoing Excellence And Premium Valuation Mean Loving IDEX From Afar

Playing a "I like it, but the shares are expensive" drinking game with my articles in the industrial sector would probably be lethal right now, but the fact remains that the market continues to reward many companies with robust valuations even though there are some pockets of weakness in short-cycle markets. IDEX (IEX) is one of my favorite companies, a disciplined deployer of capital with strong niche-based businesses and excellent margins, but it's hard to see how IDEX shares can keep generating attractive returns from this high level.

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Ongoing Excellence And Premium Valuation Mean Loving IDEX From Afar

IDEX Is A Best Of Breed Industrial, And Priced Accordingly

Companies like IDEX (IEX) will frustrate you if you’re a value investor. Undeniably excellent, IDEX rarely gets that cheap, as the company’s strong margins, ROIC, and business quality seem to keep it from ever getting all that cheap. I’d love to own what I think is one of the best fluid management companies out there (and a contender for best-run industrial overall), but you have to really stretch to argue that IDEX shares are in any way undervalued. That said, the market can do some crazy things and this is definitely a name that investors who are interested in the industrial sector should have high on their watch list for a “just in case” scenario.

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IDEX Is A Best Of Breed Industrial, And Priced Accordingly

Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Crane (CR) has always been a bit of an odd duck. While there are plenty of multi-industrials out there, Crane’s $3 billion revenue base and $5 billion market cap makes it a small player among the conglomerates and one with a fairly unusual (albeit very diverse) mix of end-markets. It’s also not especially widely-followed, with only about a half-dozen sell-side analysts covering it and less than 75% institutional ownership. Now add in some odd trends and market signals, and this is a somewhat challenging story to evaluate.

I didn’t like Crane’s valuation back in February of this year, and the shares have underperformed the broader industrial group since then (as well as the S&P 500) with a roughly 10% decline. Now, though, there seems to be growing momentum in the Fluid Handling and Aero businesses, and margins seem to be coming along a little better than expected. If Crane’s late-cycle exposure bears it out as a late bloomer, this could now be a time to consider the shares.

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Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

IDEX's Differentiated Model Supporting Above-Average Growth

IDEX’s (IEX) focus on differentiated, mission-critical products for comparatively niche applications continues to serve it well in what has been a sometimes shaky market for industrials this year. With the shares up about 5% this year and closer to 25% over the past 12 months, IDEX has been one of the better-performing industrials, which fits with the company’s better-than average revenue and order growth and margin leverage.

Valuation remains my primary issue with the company. I have no problem modeling above-average long-term growth for IDEX, and I believe companies with strong margins and ROICs deserve a premium, but it’s tough to make the numbers work today. Should the company stumble around a quarterly earnings report and/or should the sector see a contraction in multiples, this is definitely a name I’d revisit.

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IDEX's Differentiated Model Supporting Above-Average Growth

Recovering Markets And Improving Margins Propelling IDEX

Things are pretty good these days at IDEX (IEX). Strong, and persistent, recoveries in markets like agriculture and water and ongoing growth in semiconductors have helped drive strong organic revenue growth, which the company has leveraged into improved margins across its businesses. Free cash flow generation has picked up and the outlook for 2018 is attractive.

The "but", as is the case for most multi-industrials, is valuation. If you believe in buying good companies no matter what the price/valuation and/or you're comfortable with implied returns in the mid-single-digits, maybe IDEX still meets your requirements. I'm less comfortable with valuation, though, and while IDEX is generating good results (and is likely to continue to do so in 2018), I'm not willing to pay such a high apparent price.

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Recovering Markets And Improving Margins Propelling IDEX

Roper Technologies Delivering Good Core Growth As Markets Turn

When I last wrote about Roper (NYSE:ROP), I wasn't totally sold on the valuation given some concerns I had about the business outside of energy and I thought it was a name to reconsider on a pullback into/around earnings. The shares cooperated, pulling back about 5% before a trifecta of good news (the U.S. Presidential election, the Deltek acquisition, and stronger results/orders in the fourth quarter) really stoked up the enthusiasm for these shares.

I've compared Roper to Danaher (NYSE:DHR) before, and I'll do it again - like Danaher, Roper can be a difficult stock for more value-oriented investors, as Wall Street loves the company's growth model and margins and will pay a premium for that growth. That seems particularly true now in a recovery environment where Roper not only seems poised to produce solid growth in absolute terms, but also on a relative basis.

Although Roper doesn't look like a bargain in discounted cash flow model, dropping the discount rate by just 1% gives me a fair value in line with the price today and a high single-digit expected return isn't bad, particularly for a company with good leverage to an emerging oil/gas recovery. Therein lies one of the issues with modeling and price target calculation - a modest change to an assumption or two can swing the result significantly. So while I still can't call Roper a bargain, the growth potential and strong cash flow generation capabilities leave it as a name still worth considering for more aggressive portfolios.

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Roper Technologies Delivering Good Core Growth As Markets Turn

IDEX Looks Like A High-Priced Recovery Play

Up almost 30% over the past year, IDEX (IEX) has not only outperformed comps like Dover (DOV), Xylem (XYL), and Colfax (CFX), but reached pretty heady valuation levels. While IDEX does have a quality collection of businesses that includes pumps, meters, and fluidics, not to mention a lot of specialty market exposure, the company's historical growth, margin, and free cash flow performance don't convince me that it's worth paying such a robust valuation today. Although I like the company's prospects for improving organic growth over the next few years and the opportunity for incremental M&A, not to mention the possibility of a lower tax rate, a mid-teens multiple on EBITDA and an implied total return in the mid-single digits on a DCF basis don't work for me.

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IDEX Looks Like A High-Priced Recovery Play

Improving Energy Buys Dover Some Breathing Room

Conditions are getting better at Dover (NYSE:DOV), but it's certainly not a symmetrical improvement at this point. The energy market is definitely getting better, whether you look at rig counts, Dover's organic growth, or its orders, but there are still some meaningful challenges in Dover's other businesses; challenges that have to be addressed if this is going to be a long-term winner.

Dover has done alright since my last update, and I think my outlook for segments like Engineered Systems and Fluids are relatively conservative. A recovery in the energy business ought to drive meaningful improvements in margins, and coupled with an expanded retail fueling business, that bodes well for overall performance. I also believe there are long-term opportunities here in polymer equipment, energy automation, refuse, auto service, and printing/ID that shouldn't be ignored. I still think management has to re-earn some credibility, but the risk/return opportunity is a little more interesting here than with most industrial conglomerates, and there is also the potential for outperformance.

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Improving Energy Buys Dover Some Breathing Room

Dover Still Searching For Traction

I want to give Dover (NYSE:DOV) management a break and the benefit of the doubt. It's easy to lose count of the number of times it has guided to lower expectations and it's easy to criticize DOV for having a poor handle on its business. On the other hand, "I don't know" are some of the hardest words to say in the English language and I scarcely believe that many on Wall Street would applaud management for admitting to low visibility on the business outlook, let alone criticize it any less than it will for being wrong.

Still, business is not healthy here. Perhaps the company is navigating through the worst of it and the next couple of quarters will see results, bookings, and guidance firm up. Likewise, it's worth noting that in a field full of expensive industrial stocks, 3% to 4% growth over the long term is enough to support Dover's share price today. While I'm not bullish on the company, I think I'm going to start paying more attention with an eye toward whether investor fatigue is creating an opportunity (or whether this collection of businesses really is that bad).

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Dover Still Searching For Traction

Investopedia: Pall Always Gets The Benefit Of The Doubt

I'd hate to be short Pall (NYSE:PLL), as large companies in the filtration space often seem as close to bulletproof as you can find in the market. So even though sell-side analysts chronically overestimate Pall's free cash flow, investors remain happy with a company that admittedly enjoys strong share and a very lucrative channel of repeat business. While I think Pall's shares remain overvalued, I don't have any particular reason to believe that the shares will sell off dramatically, as the life sciences business should be stable and the industrial business should start improving next year.

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Investopedia: Dover's Opportunities Matched Only By Wall Street's Enthusiasm For Them

Any significant worries about a failure of the second half industrial recovery thesis seem to have been set aside for Dover (NYSE:DOV). With the company deciding to spinoff its Knowles electronic components business and outlining significant opportunities in markets like energy and refrigeration, analysts and investors are on board with the solid potential of this industrial conglomerate. Although Dover is by no means overvalued and should offer better growth than most of its peers, newcomers to the story may just want to wait in the hopes of a better entry price.

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Seeking Alpha: Colfax - Balancing Growing Pains And Growth Potential

In an industrial sector that has already seen investors prove more than willing to value stocks with a benefit of a doubt, Colfax (CFX) carries an even larger premium by conventional metrics. I suspect that this has more to do with the company's ties to Danaher's (DHR) legacy than ample enthusiasm for gas/fluid handling and welding, but that's neither here nor there. While investors cannot lose sight of the risk that the ESAB turnaround efforts take too long or accomplish too little, a cash flow-based model suggests Colfax may in fact be trading at a discount today.

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Colfax - Balancing Growing Pains And Growth Potential

Seeking Alpha: Crane Needs To Reach For Better Performance

What do vending machines, pumps, fiberglass RV panels, and airplane brakes have in common? If you answered "huh?" you win - Crane's (CR) many and varied businesses don't always fit together in the most seamless fashion, and the company hasn't really been a model of shareholder value accretion over the years. That said, this is a company with strong market share in many of its businesses and what looks like a renewed focus on margins. Although today's share price doesn't leap out as a bargain, better execution on the new plan(s) could offer some upside.

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Crane Needs To Reach For Better Performance