IDEX Gains From Buyouts Despite Industrial Market Weakness

We have issued an updated research report on IDEX Corporation (NYSE:IEX) on Feb 19.

The company specializes in a diverse range of applications such as fluid and metering technologies; health and science technologies; and fire, safety and other products. It currently has a market capitalization of $13.3 billion.

Factors Favoring IDEX

Multiple Tailwinds: Diversification is a boon for IDEX. It has presence in multiple end markets — including life science, water & wastewater, chemical, fire and rescue, agricultural, food, general industrial, and energy. Weakness in one or more markets offsets gains in other markets.

Also, the company is poised to benefit from solid product portfolio, growth investments and execution abilities. Its restructuring measures — undertaken in the fourth quarter of 2019 — are predicted to results in savings of $15 million in 2020.

Acquired Assets: The company has been investing in acquisitions over time. It acquired intellectual property assets of Phantom Controls in June 2018 and Finger Lakes Instrumentation in July of the same year.

In July 2019, IDEX acquired Velcora Holding AB along with its Steridose and Roplan businesses. Since then, the buyout has been strengthening the sealing solutions platform. Also, IDEX recently signed an agreement to acquire Flow Management Devices. The buyout will likely enable IDEX to offer better solutions to chemical manufacturers, refineries and pipeline operators. Completion of the transaction is anticipated in the first quarter of 2020.

Notably, acquired assets had a positive impact of 2% on sales in the fourth quarter of 2019. In 2020, IDEX expects acquisitions to positively impact revenues by $21 million and earnings by 3 cents per share.

Rewards to Shareholders: The company believes in rewarding shareholders handsomely through share buybacks and dividend payouts. In 2019, it distributed dividends totaling $147.2 million and repurchased shares worth $54.7 million.

It is worth mentioning here that the company announced a hike of 16% in its quarterly dividend rate to 50 cents per share in May 2019. We believe that healthy cash flow will support it to return more value to shareholders in the quarters ahead.

Factors Working Against IDEX

Top-Line Woes: In fourth-quarter 2019, the company’s revenues declined 1.3% year over year and lagged the Zacks Consensus Estimate by 1.5%. Weak global demand for industrial products along with prevailing uncertainties related to the global economy resulted in a 2% decline in organic sales. Forex woes had adverse impacts of 1%.

The company expects to face headwinds from challenging industrial markets in the first half of 2020. It expects organic sales to be down 2% to flat in 2020, with a decline of 4-5% in the first quarter. Total revenues in the year are predicted to be $2,465-$2,515 million, suggesting 1% decline to 1% growth from that reported in the previous year.

Bottom-Line Related Headwinds: In fourth-quarter 2019, IDEX’s earnings lagged estimates by 1.48%. For 2020, the company anticipates adjusted earnings of $5.55-$5.85 per share, suggesting a 4% decline to 1% rise year over year.

As noted, growth investments in the year are predicted to hurt earnings by 4 cents per share, while variable compensation is expected to have adverse impacts of 6-10 cents. Also, tax rate will likely negatively impact by 10 cents per share.

Share Price Performance and Earnings Estimate Revision: Market sentiments have been against IDEX for quite some time now. Its stock price has increased 7.6% in the past three months compared with the industry’s growth of 8.2%.

Furthermore, the company’s earnings estimates have been lowered in the past 30 days. Currently, the Zacks Consensus Estimate for its earnings is pegged at $5.74 for 2020 and $6.14 for 2021, reflecting declines of 4.7% each from the respective 30-day-ago numbers. Also, estimates for the first quarter of 2020 have been lowered by 10.8% to $1.32 in the past 30 days. The company currently carries a Zacks Rank #4 (Sell).

IDEX Corporation Price and Consensus