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Why Is Colfax (CFX) Down 0.2% Since Last Earnings Report?

It has been about a month since the last earnings report for Colfax (CFX). Shares have lost about 0.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Colfax due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Colfax Q1 Earnings Top Estimates, Gain From Buyouts

Colfax reported better-than-expected results for the first quarter of 2019, with earnings surpassing estimates by 8.2%. This was the 14th consecutive quarter of impressive results recorded by the company.

This machinery company's adjusted earnings in the reported quarter were 53 cents per share, surpassing the Zacks Consensus Estimate of 49 cents. Moreover, the bottom line increased 10.4% from the year-ago figure of 48 cents, primarily on the back of growth in existing businesses, benefits from acquired assets and margin improvement.

Benefits From Acquired Assets Drive Revenues

In the quarter under review, Colfax's net sales were $1,007.7 million, reflecting growth of 14.4% from the year-ago quarter. The improvement was driven by 1.6% growth in existing businesses and 19.2% benefit from acquired assets, partially offset by adverse impact of 6.4% from foreign currency movements.

However, the top line lagged the Zacks Consensus Estimate of $1,032 million by 2.4%.

The segmental information is briefly discussed below:

Revenues from the Air and Gas Handling segment were $323.7 million, decreasing 6.8% year over year. Results were adversely affected by impacts of 2.8% from existing businesses and 5.8% impact of unfavorable movements in foreign currency translations. However, acquired assets had a positive impact of 1.8%.

This segment's orders were worth $384.3 million in the reported quarter, reflecting year-over-year growth of 17.5%. The improvement was driven by rise in industrial, mining, power generation, and oil, gas & petrochemical orders. Backlog at the end of the quarter was $893 million, up 0.4% year over year.

Revenues from Fabrication Technology totaled $560.4 million, increasing 5.1% year over year on the back of solid product portfolio and favorable pricing.

It is worth mentioning here that favorable pricing had a positive 5.1% impact on sales growth while acquisitions added 7.3%. This was partially offset by 6.7% negative impact of foreign currency translations and a 0.6% decline in volume.

Revenues from Medical Technology totaled $123.5 million. This segment includes the results of DJO Global.

Margins Improve Y/Y

In the quarter under review, Colfax's cost of sales increased 6.4% year over year to $649.4 million. It represented 64.4% of net sales compared with 69.3% in the year-ago quarter. Gross margin increased 490 basis points (bps) year over year to 35.6% on the back of synergistic gains from acquired assets, operational improvements, and gains from restructuring actions. Selling, general and administrative expenses increased 58.7% year over year to $318.1 million. It represented 31.6% of net sales.

Adjusted earnings before interest, tax and amortization (EBITA) in the quarter under review increased 39.6% year over year to $126.7 million. Also, adjusted EBITA margin grew 230 bps to 12.6%. Interest expenses in the quarter grew 203.7% year over year to $29.1 million.

Balance Sheet and Cash Flow

Exiting the first quarter, Colfax had cash and cash equivalents of $242.4 million, roughly 1.6% below $245 million at the end of the last reported quarter. Long-term debt balance increased substantially to $4,037.1 million from $1,192.4 million in the previous quarter.

In the reported quarter, the company used net cash of $72.3 million for operating activities, significantly above $2.7 million used in the prior-year quarter. Capital used for purchasing property, plant and equipment totaled $24.4 million, reflecting year-over-year growth of 119.5%.

Outlook

For the first half of 2019, Colfax anticipates adjusted earnings per share of $1.11-$1.14, high compared with $1.09 recorded in the year-ago comparable period. The results will benefit from healthy operating performance in the Air & Gas Handling and Fabrication Technology segments as well as from synergistic gains of acquired assets.

Also, the company noted that tax rate will be high in the first half of 2019 and forex woes will continue to adversely influence results.

For 2019, it maintained the previously provided adjusted earnings guidance at $2.55-$2.65 per share. This suggests an improvement of more than $2.31 recorded in 2018.

The company anticipates the Air & Gas Handling segment's core sales to grow in a mid to high-single digit. For the Fabrication Technology segment, core sales are likely to grow in a mid-single digit. It believes that effective pricing activities will offset adverse impacts of forex woes and inflation.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -9.18% due to these changes.

VGM Scores

Currently, Colfax has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Colfax has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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