Colfax (CFX) Shares Up 57.7% YTD: What's Driving The Rally?

Shares of Colfax Corporation (NYSE:CFX) have rallied 57.7% so far this year. Also, the company has outperformed its industry’s growth of 31.1% over the same time frame.

This Zacks Rank #3 (Hold) stock, with a market cap of $3.9 billion, has impressed investors with its recent earnings streak. It surpassed estimates in the trailing four quarters, the average positive surprise being 8.26%.

Let’s analyze the reasons behind the company’s impressive price performance and find out if there is room for further appreciation.

Growth Drivers

Over time, Colfax has been leveraging business opportunities through acquisition of assets. In this regard, the buyout of DJO Global (completed in February 2019) is worth mentioning. The deal has helped the company to diversify the business structure and enter into the orthopedic solutions industry.

Also, it completed the divestment of its Air & Gas Handling business in September 2019. This transaction will help Colfax to attain its leverage target and increase profitability as well as help in supporting buyouts in its Fabrication Technology and Medical Technology segments.

Also, the company’s focus on strengthening segmental businesses and productivity actions, product developments, and expansion in emerging markets (including China, India, Brazil and others) will be beneficial.

Estimate Revisions

The Zacks Consensus Estimate for 2019 earnings has climbed 1.5% over the past 30 days from $1.95 to $1.98, on account of six upward estimate revisions versus two downward.

Upbeat Q3 Performance & View

Colfax reported adjusted earnings per share of 50 cents in third-quarter 2019, marking a 127.3% year-over-year rise. Moreover, the figure beat the Zacks Consensus Estimate by 8.7%. This earnings improvement is primarily attributable to solid sales performance, driven by benefits from acquired assets.

For 2019, the company believes that it is poised to achieve adjusted earnings of $1.90-$2.00 from continuing operations.

However, a highly leveraged balance sheet seems to be a concern for Colfax. The company had long-term debt of $4,002.4 million at the end of the third quarter of 2019, reflecting 235.7% increase from the 2018 end level. Higher debts also increased its interest expenses by 159.5% year over year in the first three quarters of 2019. Also, the company seems to be more leveraged than the industry, with respective long-term debt-to-capital ratio of 56.8% and 47.3%.

Key Picks

Some better-ranked stocks from the same space are Kaman Corp. (NYSE:KAMN) , Tennant Company (NYSE:TNC) and Dover Corp. (NYSE:DOV) . While Kaman and Tennant sport a Zacks Rank #1 (Strong Buy), Dover carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kaman pulled off average positive surprise of 7.72% in the last four quarters.

Tennant pulled off average positive surprise of 28.65% in the last four quarters.

Dover’s average positive earnings surprise in the last four quarters was 6.70%.

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