Over the past several months, things have gone quite well for shareholders of Standex International (NYSE:SXI). For those not familiar with the company, it operates as a diverse player in the industrial manufacturing space. It produces a wide array of products, including sensing and switching technologies like magnetic power conversion components and similar offerings that can be used in security products, appliances, medical products, and more. It also provides custom textures and surface finishes that are used on tooling, plus it produces specialty temperature-controlled equipment for the medical industry, industrial firms, and more. In addition to this, it also engages in the sale of products that go into the construction of fuel tanks, rocket engine components, spacecraft structures, turbines for energy production, and more. The list of examples goes on from here, but you get the idea of just how diverse this enterprise is.
When I say that things have gone well, this is in reference to the window of time stretching from when I last wrote about the company in November of last year through the present day. Back then, I rated the business a ‘buy’ to reflect my view that shares should outperform the broader market for the foreseeable future. This was based on growth prospects for the company as set forth by management, as well as how shares were priced. However, the ‘buy’ rating was a soft ‘buy’, which reflected my belief that the outperformance would not be astronomical. And that is exactly what we have seen. Since the publication of that article, shares are up 27.2%. That’s comfortably above the 18% increase seen by the S&P 500 over the same window of time.
Given this upside, as well as the fact that fundamentals have continued to change since the publication of that article, I figured it would be a wise idea to revisit the business at this time. What I found was that, while I still believe in the long-term outlook for the company, shares seem to be at least fairly valued and might even be a bit on the lofty side. Because of this, I have decided to downgrade the business to a ‘hold’ at this time.
Time for a downgrade
Fundamentally speaking, Standex International remains an interesting and profitable company. However, I would be lying to you if I said that everything since I last wrote about the company has been great. The fact of the matter is that some financial performance has been on the weak side of things. As an example, we need only look at revenue covering the third quarter of the 2024 fiscal year. During that time, sales totaled $177.3 million. That’s 3.8% lower than the $184.3 million generated one year earlier. Interestingly, the picture would have been worse had it not been for some acquisitions the company made.
Organic sales, for instance, followed by $10.5 million year over year. This 5.7% drop was attributable to headwinds in the company’s end markets that management described as ‘transitory’. In particular, demand was lower in its Electronics and Scientific segments. Acquisitions, on the other hand, impacted the company positively to the tune of $10.6 million. However, divestitures hit the business to the tune of $5.5 million. In addition to this, the company took a roughly $1.6 million hit associated with foreign currency fluctuations.
With revenue falling, it should come as no surprise that profitability would take a hit. Income plummeted from $80.5 million to $15.8 million. However, this does require a bit of an explanation. The fact of the matter is that, in the third quarter of 2023, Standex International booked a $62.1 million gain on the sale of business operations. But even without this, profitability for the company would have fallen slightly, with pretax income excluding this gain falling from $24.3 million to $15.9 million. Other profitability metrics were far more stable. Operating cash flow, for instance, rose from $23.3 million to $24.4 million. But if we adjust for changes in working capital, we would get a drop from $30.8 million to $20.4 million. Meanwhile, EBITDA remained flat year over year at $34.5 million.
The third quarter was not the only period in which the business experienced some weakness. For the first nine months of 2024 as a whole, revenue totaled $540.4 million. That’s a drop of 2.2% over the $552.7 million the company generated one year earlier. This was in spite of the fact that the company benefited to the tune of $28.8 million from acquisitions. Organic sales revenue dropped $20.1 million, while divestitures hit the company to the tune of $21.3 million. Clearly, these more than offset the benefit from the aforementioned acquisitions. Other profitability metrics have been mixed. Net income, for instance, was cut by more than half from $118.8 million to $53.5 million. And as you can tell in the chart above, one of the company’s three cash flow metrics worsened year over year.
Unfortunately, management has not provided any detailed guidance for the rest of the 2024 fiscal year. But if we annualize the results experienced so far, we would expect net income of around $62.6 million, adjusted operating cash flow of about $95.3 million, and EBITDA totaling $141.9 million. With those results, as well as historical figures for 2023, I was able to value the company as shown in the chart above. These multiples suggest to me that the stock is at least fairly valued. In that same chart, you can see how shares were priced when I last wrote about the company. On an absolute basis, there is no denying that the stock has gotten more expensive. But shares are also more expensive relative to similar firms. In the table below, I compared it to five such businesses. When it came to both the price to earnings approach and the price to operating cash flow approach, three of the five businesses were cheaper than Standex International. This number increased to four of the five companies when using the EV to EBITDA approach.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Standex International | 33.1 | 21.7 | 14.7 |
Tennant Company (TNC) | 17.3 | 12.3 | 11.0 |
Enerpac Tool Group (EPAC) | 30.3 | 28.9 | 16.8 |
Kennametal (KMT) | 19.5 | 7.2 | 8.8 |
Barnes Group (B) | 455.2 | 26.9 | 14.4 |
Hillman Solutions (HLMN) | 721.0 | 8.5 | 13.6 |
With numbers like these, I cannot in good faith rate the business any higher than a ‘hold’ at this time. But this doesn’t mean that I am bearish about the business in the long run. The fact of the matter is that the company has a lot going for it. One thing that management has tried to relay to investors is that the company should benefit, for instance, from the continued growth of electric vehicle adoption. As you can see in the image below, it’s expected that the number of vehicles produced annually should grow from 88 million on a global scale in 2023 to 97 million by 2030. The share of electric vehicles, particularly BEVs (battery electric vehicles) is expected to grow from only 12% to 32% during this window of time. And as the image illustrates, the amount of content that the company produces per vehicle is potentially significantly larger than it has been in internal combustion engines. This could open up significant revenue opportunities for the company.
Of course, this is not only an electric vehicle play. A company as diverse as this cannot be anything other than multiple plays. The fact of the matter is that management believes in the growth potential of the company across multiple different markets. For instance, they believe that the Electronics segment has industry-wide potential of $5 billion or more on an annual basis. In 2023 alone, the company generated only $306 million from this part of the enterprise. Other market opportunities are considerably smaller. But they are nothing to scoff at. The Engraving segment, as an example, operates in a more than $500 million market, with the company generating only $152 million in sales from that space last year. The Scientific segment is considerably smaller, generating only $75 million in revenue in 2023. But the market potential, at over $700 million, it’s quite large. The same can be said of the Engineered Technologies segment, which was responsible for only $81 million last year but which operates in a more than $700 million a year industry. And lastly, the Specialty Solutions segment was responsible for $127 million in adjusted revenue. And it operates in an industry worth over $1 billion. About 60% of that opportunity seems to be in custom hoists.
In fact, management maintains that there is a real opportunity for the company to grow to $1 billion a year in revenue or more by 2028. And if the past is any indication of the future, profit margins should expand during this time. Back in the first quarter of 2021, for instance, Standex International exhibited a 10.9% adjusted operating profit margin. That number has risen to 16.1% as of the third quarter of the 2024 fiscal year. But if everything goes according to plan, by the time that the company hits $1 billion in sales, it’s expected that the adjusted operating profit margin should expand to 19% or more.
Of course, this will not be an easy task for the company to achieve. Significant investments will be required in order to capture this kind of upside. However, management is no stranger to that. From 2019 through 2023, Standex International has allocated around 36% of its cash flows toward acquisitions. This is in addition to 20% that has been allocated toward capital expenditures. 26% of cash flow has been used for share buybacks during this time, while the remaining 12% has been allocated toward dividends. This shows that management is trying to reward shareholders directly while simultaneously focusing on growth. That’s usually a positive for most investors.
Takeaway
Fundamentally speaking, things are good, but not great when it comes to Standex International. The company has seen some weakness as of late. Having said that, I believe that, in the long run, this prospect will do quite well for itself. But this doesn’t mean that it makes sense to hold on to shares. The fact of the matter is that the stock has seen some rather significant upside since I came out with a bullish assessment of it late last year. Given how much upside it has seen, combined with the aforementioned weaknesses, I think that it’s time to finally downgrade the stock to a ‘hold’.
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