Colfax To Gain From Solid Product Lines & Buyouts Amid Risks

On Feb 24, we issued an updated research report on Colfax Corporation (NYSE:CFX) .

In the past three months, this Zacks Rank #3 (Hold) stock has gained 9.6% compared with the industry’s rise of 7.1%.

Colfax is well positioned to benefit from its focus on strengthening segmental businesses, productivity actions, innovation investments and product developmental initiatives. Going forward, a sturdy traction in the company’s Medical Technology segment, driven by progress in the reconstructive and prevention & rehabilitation product lines is likely to bolster its top-line performance.

Also, the company follows a sound capital-allocation strategy. Its focus on investing in innovation, business expansion and buyouts is likely to prove conducive to growth. Notably, for 2020, it anticipates generating more than $250 million of free cash flow to support its acquisition pipeline.

Moreover, Colfax intends to become more competent on the back of meaningful business acquisitions. In this regard, the company’s buyout of DJO Global (February 2019) was in sync with its efforts to diversify the business structure and enabled its entry into the orthopaedic solutions industry. It predicts that the DJO Global buyout will continue to be beneficial in the quarters ahead.

However, escalating costs have been a major cause of concern for Colfax over the past few quarters. For instance, in the third and the fourth quarters of 2019, its cost of sales rose 35.6% and 25.2%, respectively, year over year. In the third quarter its selling, general and administrative expenses jumped 124.2% while in same in the fourth quarter increased 96.6%. We believe that rising costs and expenses will be detrimental to the company's margin.

In addition, analysts have also become increasingly bearish on Colfax. In the past 60 days, the Zacks Consensus Estimate for 2020 earnings has declined from $2.20 to $2.19 on account of two downward estimate revisions against none upward.

Key Picks

Some better-ranked stocks from the Zacks Industrial Products sector are Graco Inc. (NYSE:GGG) , Dover Corporation (NYSE:DOV) and Tetra Tech, Inc. (NASDAQ:TTEK) . While Graco sports a Zacks Rank #1 (Strong Buy), Dover and Tetra Tech carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Graco pulled off positive surprise of 0.40%, on average, in the last four quarters.

Dover delivered positive earnings surprise of 5.36%, on average, in the trailing four quarters.

Tetra Tech came out with positive surprise of 8.31%, on average, in the last four quarters.

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