Summary
- Colfax came up a little short with revenue, despite stronger Fabrication sales, but the segment-level profitability was a little better than expected.
- Air & Gas Handling continues to move through a difficult adjustment process, but the comps get easier in the third quarter and most end-markets have further room to recover.
- Colfax's valuation looks undemanding on a DCF basis, and there are multiple opportunities for management to create value through execution and surpass low expectations.
Healthier demand in manufacturing and heavy industry is positive tide that is lifting a lot of boats these days, and Colfax (CFX) too is seeing some benefit. While the company continues to go through a painful adjustment process in its Air & Gas Handling business, the trend should start to improve relatively soon and there seems to be room for more growth in multiple end-markets. Management also seems to be more inclined to restructure and buy back shares rather than add a new business group, and that looks like a smart decision on balance for the time being.
I’ve been clear in the past that I have serious doubts about this business; I am not sold on the long-term value of the Air & Gas Handling business and I think the company will struggle to make real headway in welding. That said, low expectations, a relatively high short ratio, and improving end-market trends, coupled with what looks like responsible decisions on the part of management, does support value here even after a decent run over the past couple of months.
