In September of last year, I called IDEX Corporation (NYSE:IEX) a value creator at work. At the time, the company, known for its bolt-on dealmaking strategy, announced a larger deal as well. Amidst this strong track record, resilient balance sheet, and stagnating share price, the appeal was on the increase, although not yet compelling enough for me.
Engineered Industrial And Technology Solutions
IDEX Corporation is a supplier of highly engineered industrial and technology solution, often used in mission-critical niches. The company seeks to create a competitive moat for these activities, acting as a base for the long-term outperformance.
The company is extremely well diversified in geographic areas, but moreover, industry verticals, being active in fire & safety, energy, life sciences, analytical instruments, pharma and many other markets. Decentralized management structures stand at the root of the success of the business.
The success has been evident, as a mere $10 stock in the year 2020 rose to $170 pre-pandemic early in 2020. Like the rest of the market, shares rallied in 2021, trading at a peak of $240 per share. Last year was mostly a period of consolidation, with shares trading around the $200 mark, although they re-tested the 2021 highs of $240 by year-end. Ever since, shares have gradually come down to $200 at this moment in time.
Looking at the actual results, we have seen IDEX post very strong 2021 results amidst easier comparables and the impact of some deals. Full year sales were up 18% to $2.8 billion, with organic growth responsible for two-thirds of the reported growth. GAAP earnings rose nearly a dollar to $5.88 per share, with adjusted earnings coming in at $6.30 per share.
Net debt of $335 million was very modest with EBITDA seen at around a billion, and with shares trading around $200 in September of last year, multiples were clearly very demanding. This was the case, even as the company hiked the 2022 earnings guidance to a midpoint of $7.93 per share, for a 26 times forward earnings multiple.
The company somewhat diverted from its bolt-on dealmaking strategy, as it paid EUR 700 million to acquire Muon Group, pushing up pro forma net debt to $1.3 billion. With leverage seen around 1.5 times, and earnings power seen at around $8 per share, and economic uncertainty on the rise, I saw valuations come down. While shares traded at over 30 times earnings, this should not be confused with an appealing situation.
Doing Well
In January, IDEX reported its 2022 results, which were very solid. Full year sales rose 15% to $3.18 billion, as operating profits rose to $751 million, translating into GAAP earnings of $7.71 per share amidst a stable share count, with adjusted earnings coming in as high as $8.12 per share. Net debt of $1.04 billion looked very reasonable and lower than the pro forma net debt load post the Muon deal, with leverage being very modest as EBITDA rose to $884 million.
The company essentially called for the business to maintain the performance in 2023. Organic sales were seen up 1-5% this year, which together with some deals should allow for quicker sales growth. Full year adjusted earnings are set to rise further to $8.50-$8.80 per share, with GAAP earnings seen flattish around $7.70 per share following higher amortization charges and higher stock-based compensation as well.
The company got off to a strong start in 2023, with first quarter sales up 13% to $845 million, half of which is generated by organic growth. Adjusted earnings per share rose thirteen cents to $2.09 per share, as the company trimmed the full year adjusted earnings outlook to a midpoint of $8.40 per share. Net debt of $960 million was more or less equal to the anticipated EBITDA number seen this year.
With 76 million shares trading at $200, the market value of the firm stands at $15.2 billion, a valuation which jumps just over $16 billion if we factor in net debt. This is equal to about 5 times sales, about 17 times EBITDA, and 24 times forward earnings, demanding multiples.
Alongside the first quarter earnings report, the company announced the CAD150 million deal to acquire Iridian Spectral Technologies, allowing IDEX to add optical coating expertise to its line-up. Serving the laser communication, telecommunication, and life science markets, Iridian will add about CAD36 million in revenues.
This works down to a 4 times sales multiple, a small discount to IDEX’s own valuation. With EBITDA margins seen in the low thirties, the company is more profitable (on a relative basis) than IDEX, set to add over CAD11 million in EBITDA. This makes that the deal comes in at lower multiples, is likely slightly accretive, but in the end, this is just a bolt-on deal, adding about a percent in sales.
And Now?
Following a seven percent increase in the quarterly dividend to $0.64 per share, investors in IDEX Corporation are clearly not in the business for the dividend yield, with the current payout only surpassing the 1% mark by a small margin. The reality is that IDEX Corporation continues to do fine, even as the company trimmed the 2023 guidance a bit, yet overall valuations continue to come down a bit.
That said, interest rates have been creeping higher, of course, as a current 24 times earnings multiple in combination with the current interest rate environment still feels a bit demanding, even as shares have been lagging for a while.
Hence, and recognizing the quality of the IDEX Corporation business, I am willing to invest at around a 20 times multiple, translating into a $170 desired entry point, making me a patient investor looking for a better entry opportunity.
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