| Featured IPO |
Week of 5/5/2008 |
A maker of fluid handling pumps, valves and systems for the industrial, oil and gas, power generation, and global navies markets, Colfax is in the sweet spot of both global industrial growth and the need for new and replacement pumps for oil and gas transportation. Formed in 1995 by two board members of the giant industrial conglomerate Danaher, the company’s subsequent buying spree of established brands has helped it rise through the ranks to become a leader in its $3.5 billion specialty pump market. Allweiler (est. 1860), Houttuin (1929), Imo (1931) and Warren (1897) are some of the oldest brands under which it markets its products. The company plans to offer 18.75 million shares at a range of $15.00 to $17.00 on the New York Stock Exchange under the symbol “CFX.” Merrill Lynch, Lehman Brothers, and UBS are the joint book runners on the deal.
Pumping steady growth and profits
Colfax’s end markets are bubbling with growth. Soaring crude oil prices are fueling steady growth in the commercial marine and energy industries, while increasing investment by emerging economies in their energy infrastructures is supporting demand for Colfax’s turnkey power turbines and other fluid handling systems. Construction of the next generation navy vessels will keep orders flowing for its valves segment. Colfax plans to capitalize these opportunities by targeting Asia Pacific (it recently opened a plant in China and acquired an Indian manufacturer), developing new, higher value-added products, and continuing to make accretive acquisitions.
The company is geographically diversified with two thirds of its revenues coming from outside the US. It generates the bulk of its revenue from manufacturing of rotary positive displacement pumps (87%), and to a lesser extent the fluid handling systems (10%) and valves (2%). Colfax’s blue chip customers include Alfa Laval, General Dynamics, Cummins, Hyundai Heavy Industries, Siemens, General Electric and the US Navy, none of which account for greater than 3% of sales. The general industrial market represents 44% of revenue, commercial marine constitutes 24%, energy accounts for another 15% and the power industry for 11%. With manufacturing facilities in Europe, North America and Asia, Colfax gains cost savings by routing lower cost products manufactured in Asia to one of its European or North American plants for use in the final product. Profit margins for the business are steady with gross margins around 35% and cash flow margins hovering in the 16%-17% range.
Risk Profile
With a majority of its revenues stemming from outside the US, the company is highly sensitive to currency rate fluctuations, especially against the Euro and the Swedish Kronor. Of the $113MM increase in revenue last year, $28MM was a result of the weak dollar. In addition, the company is tangled in a significant amount of asbestos-related personal injury lawsuits. Even though it carries insurance coverage that is three times its liabilities, it estimates a $71MM cash outlay over the next 15 years (approximately $4.7MM annually) which will roughly represent 10% of earnings annually. Other concerns include its exposure to cyclical industries and rising raw materials costs (although historically Colfax has been able to pass on the costs to its customers).
Outlook
Even though the two co-founders are selling more than half their stake and are receiving a large dividend, we believe Colfax is currently in the right place at the right time. Colfax’s focus on rapidly growing industries and geographic areas, its established position in its niche markets and its successful history of making accretive acquisitions in the highly fragmented environment make it a sound fundamental story. Investor interest in the sector has been strong, and the deal is being pitched at a discount to its publicly traded peers.
Even though the two co-founders are selling more than half their stake and are receiving a large dividend, we believe Colfax is currently in the right place at the right time. Colfax’s focus on rapidly growing industries and geographic areas, its established position in its niche markets and its successful history of making accretive acquisitions in the highly fragmented environment make it a sound fundamental story. Investor interest in the sector has been strong, and the deal is being pitched at a discount to its publicly traded peers.
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