February 03, 2015 IDEX Corporation Current Recommendation Prior Recommendation Neutral Date of Last Change 08/01/2011 Current Price (02/02/15) $73.51 Target Price $77.00 NEUTRAL (IEX-NYSE) SUMMARY IDEX reported healthy fourth quarter 2014 results with year-over-year increase in earnings. The reported earnings also beat the Zacks Consensus Estimate by $0.02. IDEX is focusing on expanding its businesses by leveraging inorganic growth opportunities. With a flexible yet disciplined focus on cost and productivity, IDEX also remains active on share repurchases to maximize shareholders value. However, operating risks regarding high R&D costs for technology-driven products and intense competitive pressure could weigh on the margins, going forward. Nevertheless, we maintain our longterm Neutral recommendation on the stock. SUMMARY DATA 52-Week High $81.58 52-Week Low $66.43 One-Year Return (%) 3.61 Beta 1.44 Average Daily Volume (sh) 369,745 Shares Outstanding (mil) 79 Market Capitalization ($mil) $5,836 Short Interest Ratio (days) 5.17 Institutional Ownership (%) 96 Insider Ownership (%) 2 Annual Cash Dividend $1.12 Dividend Yield (%) 1.52 5-Yr. Historical Growth Rates Sales (%) 9.8 Earnings Per Share (%) 15.9 Dividend (%) 17.1 using TTM EPS 20.6 using 2015 Estimate 20.0 using 2016 Estimate 17.7 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Growth Industry Mach-Genl Indl Zacks Industry Rank * 218 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 494 A 518 A 491 A 521 A 2,024 A 2014 544 A 547 A 533 A 524 A 2,148 A 2015 551 E 560 E 546 E 551 E 2,208 E 2016 2,240 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.74 A $0.76 A $0.78 A $0.82 A $3.10 A 2014 $0.91 A $0.88 A $0.88 A $0.89 A $3.56 A 2015 $0.82 E $0.93 E $0.96 E $0.97 E $3.68 E 2016 $4.15 E Projected EPS Growth - Next 5 Years % 15 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Headquartered in Lake Forest, IL, IDEX Corporation is an applied solutions company that specializes in a diverse range of applications such as fluid and metering technologies; health and science technologies; and fire, safety and other products built to customer specifications. Serving high-growth niche markets, the company operates under three business segments, namely Fluid & Metering Technologies, Health & Science Technologies and Fire & Safety/Diversified Products. IDEX sells its products to original equipment manufacturers (OEMs), as well as to direct end-use customers across the globe. The growth strategy of the company hinges on focused investments in new products and markets, acquiring complementary technologies to supplement its existing product portfolio and building operational and commercial excellence to continuously deliver superior performance to its customers. The Fluid & Metering Technologies segment (FMT, 43% of fourth-quarter 2014 revenues) produces pumps, compressors, flow meters and related controls for the movement of liquids and gases in various end markets ranging from the food, chemical, general industrial, water & wastewater, agricultural and energy industries. This segment operates in five subgroups namely Energy, Water (comprised of Water Services & Technology and Diaphragm & Dosing Pump Technology), Chemical, Food & Process platforms as well as the Agricultural group (comprised of Banjo). FMT serves a diverse range of end markets, including industrial infrastructure (fossil fuels, refined & alternative fuels, and water & wastewater), chemical processing, agricultural, food & beverage, pulp and paper, transportation, plastics and resins, electronics and electrical, construction & mining, pharmaceutical and bio-pharmaceutical, machinery and numerous other specialty niche markets. The Health & Science Technologies segment (HST, 36%) provides various precision fluidics solutions including pumps, valves, degassing equipment, corrective tubing, fittings, and complex manifolds, as well as specialty medical equipment and devices used in life science applications. This segment operates in six sub groups named as the IDEX Optics & Photonics, Scientific Fluidics, Material Processing Technologies platforms, Sealing Solutions, Micropump and Gast. The Fire & Safety/Diversified Products segment (FST, 21%) produces fire fighting pumps, rescue tools, lifting bags, and other components and systems for the fire and rescue industry, as well as engineered stainless steel banding and clamping devices used in various industrial and commercial applications. This segment operates in four sub groups namely, Dispensing, Rescue, Band-It and Fire Suppression Equity Research IEX Page 2
REASONS TO BUY IDEX s products are sold in various niche markets to a wide range of industries throughout the world. The company is currently striving to expand its businesses in the emerging markets by focusing on organic growth. IDEX also aims to increase its market exposure and improve sales mix by continually developing new products. With a flexible yet disciplined focus on cost and productivity, IDEX expects to successfully tap newer markets to augment its revenue. Acquisitions over time have been IDEX s most favored mode for penetrating unexplored markets. These acquisitions expand its geographic reach, fill technology gaps and strengthen foothold in the existing markets while expanding its product lines. By leveraging the acquisition of FTL Seals Technology, Ltd, the sealing business of the company is executing a focused strategy to grow its portfolio of highly engineered sealing solutions for the oil and gas, semiconductor and industrial markets. IDEX continues to fund organic growth while pursuing strategic acquisitions, increasing dividends and remaining active on share repurchases. The capital investments are an integral part of company s strategy to maximize shareholders value. The company intends to optimize its cost structure, increase its competitiveness and reallocate resources to improve profitability. IDEX undertook about $14 million of cost actions, which are expected to deliver $15 million in additional profits in 2015. In its Fire business, IDEX intends to target new markets for fire suppression trailers in the power generation market. The longterm growth prospects of the company, therefore, appear to be quite encouraging. In order to better serve its customers, IDEX has sharpened its focus on the market segments that offer the greatest opportunity for long-term growth and on the critical few customers that will drive that growth. The company has consolidated similar product lines and has built definite product-line strategies to drive growth and profitability. Moving forward, the company is diligently focusing on developing talented global teams that are committed to IDEX Operating Model for an effective execution of its operational plans. IDEX also remains bullish about its top and bottom-line growth and expects its 2015 earnings in the range of $3.65 to $3.75 per share. As a part of its strategy to leverage inorganic growth opportunities through potentially lucrative acquisitions, the company bought Aegis Flow Technologies a leading producer of valve products. With applications in chemical processing and food and beverage industries, Aegis will enable further expansion of IDEX s product portfolio. Aegis has been integrated into the company s FMT segment, wherein it will offer its rich technological expertise to the latter s Chemical, Food & Process platform. Aegis will serve the chemical, petro-chemical, and chlor-alkali industries situated around the Gulf of Mexico, extending the company s footprint in the region. REASONS TO SELL IDEX procures substantial amounts of raw materials and components from suppliers across the globe. As such, the company is susceptible to various operating risks, including the availability and prices for raw materials, curtailment or change in parts and components, interruptions in production by suppliers, changes in exchange rates and prevailing price levels. These affect its cash flow and restrict its growth momentum to some extent. The company operates in a highly competitive industry. Maintaining and improving its competitive position entails continued investment in manufacturing, engineering, quality standards, marketing, customer service and support and distribution networks. This involves huge recurring R&D expenses that increase its operating costs. This also reduces the company s price control over its products, which may further result in the loss of market share, declining sales and lower operating margins. With operations across five continents, IDEX s performance is exposed to the adverse impact of macroeconomic cycles in the U.S. and international markets. Given its international presence, the Equity Research IEX Page 3
company also faces unfavorable foreign currency movements, impacting its bottom-line growth. Any future slowdown in the global economy will have an adverse impact on its business, and would hamper its long-term growth potential. RECENT NEWS IDEX Beats on Q4 Earnings, Misses Revenue Estimates December 31, 2014 IDEX reported adjusted net income of $71.1 million or $0.89 per share in fourth-quarter 2014 versus $67.6 million or $0.82 per share in the year-ago quarter. The adjusted earnings beat the Zacks Consensus Estimate by $0.02. The year-over-year improvement in earnings was primarily driven by higher revenues. For full-year 2014, adjusted net income stood at $288.8 million or $3.57 per share versus $255.2 million or $3.09 per share in 2013. The adjusted earnings for full-year 2014 beat the Zacks Consensus Estimate of $3.55 per share. GAAP net income in the reported quarter came in at $61.6 million or $0.77 per share versus $67.6 million or $0.82 per share in the year-earlier quarter. For full-year 2014, GAAP net income came in at $279.4 million or $3.45 per share versus $255.2 million or $3.09 per share in 2013. Revenues Net sales improved to $523.9 million in the reported quarter, up 1.0% year over year. The reported sales missed the Zacks Consensus Estimate of $535 million. Organic growth contributed 2% to sales, while acquisitions contributed 1%, partially offset by negative foreign currency translation impact of 2%. Net sales improved to $2,147.8 million for full-year 2014, up 6% year over year. Organic growth contributed 5% to sales, while acquisitions contributed 1%. Orders in the reported quarter stood at $517 million, down 1% from the year-ago quarter. Full year 2014 orders stood at $2.1 billion, up 2% from 2013. By segments, Fluid and Metering Technologies (FMT) reflected a 2% increase from the prior-year period to $226.9 million. Organic and inorganic growth for the segment increased 2% year over year each. The Health and Science Technologies (HST) segment revenues came in at $189.1 million in the reported quarter, improving 4% from the prior-year quarter. The Fire and Safety/Diversified Products (FSD) segment recorded sales of $109.0 million, down 8% from the year-ago quarter due to lower volume within the Dispensing Equipment business. Margins Operating income stood at $94.4 million versus $103.9 million in the year-ago quarter. Adjusted Earnings before Interest, Taxes Depreciation and Amortization (EBITDA) stood at $128.2 million versus $122.8 million in the year-ago quarter. The FMT segment recorded an adjusted operating margin of 24.9% in the reported quarter, flat with the year-ago quarter. The HST segment s adjusted operating margin came in at 22.9%, up 470 basis points from the prior-year quarter, driven by improved volume and productivity initiatives. Equity Research IEX Page 4
The FSD segment recorded an adjusted operating margin of 22.5% in the reported quarter, down 180 basis points from the year-ago quarter. The year-over-year decrease was due to lower volumes. Balance Sheet and Cash Flow As of Dec 31, 2014, IDEX had cash and cash equivalents of $509.1 million compared with $439.6 million as of Dec 31, 2013. Long-term debt stood at $765.0 million at year end 2014 compared with $772.0 million at year end 2013. Cash flow from operating activities aggregated $368.0 million for full year 2014 compared with $401.5 million in the previous year. Free cash flow was $326.2 million as of Dec 31, 2014 versus $378.5 million as of Dec 31, 2013. IDEX repurchased 3 million shares of common stock for $223 million in 2014. It plans to continue with its share repurchase and dividend programs, as part of its long-term strategy to provide attractive riskadjusted returns to its stockholders. Outlook IDEX remains optimistic about its top and bottom-line growth. The company intends to continue pursuing organic growth strategies as well as leverage inorganic growth opportunities through potentially lucrative acquisitions. However, some headwinds are expected in 2015 from large non-recurring projects of 2014, the strong U.S. dollar, falling oil prices and an uncertain global economy. The company expects first-quarter 2015 earnings to be in the range of $0.81 $0.83 per share and fullyear 2015 earnings in the range of $3.65 to $3.75. The company expects organic revenue growth to be approximately 1% to 2% in 2015 and operating margin of approximately 21%. Equity Research IEX Page 5
VALUATION At its current price, IDEX s trailing 12-month earnings multiple is 20.6x, compared with the 27.0x average for the peer group and 18.3x for the S&P 500. Over the last five years, the company s shares have traded in the range of 12.7x to 24.5x trailing 12-month earnings. The stock is trading at a premium to the peer group based on forward earnings estimates. We maintain our Neutral recommendation on the stock with a target price of $77.00, which is based on 20.9x our 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low IDEX Corporation (IEX) 20.0 17.7 14.7 15.6 20.6 24.5 12.7 Industry Average 16.1 13.6 13.5 37.1 27.0 55.9 10.3 S&P 500 15.9 14.9 10.7 15.0 18.3 19.4 12.0 Applied Industrial Technologies, Inc. (AIT) 13.4 12.1 12.0 12.1 14.5 24.8 11.5 The Babcock & Wilcox Company (BWC) 11.5 10.5 8.7 9.3 14.3 25.8 12.9 Kaman Corporation (KAMN) 14.0 13.5 15.0 10.9 17.6 25.4 12.5 Nordson Corporation (NDSN) 17.3 15.6 16.0 14.9 18.8 25.2 12.6 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA IDEX Corporation (IEX) 3.9 4.0 1.7 17.8 0.5 1.5 11.7 Industry Average 2.8 2.8 2.8 20.6 0.4 0.7 7.9 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research IEX Page 6
Earnings Surprise and Estimate Revision History Equity Research IEX Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of IEX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1117 companies covered: Outperform - 15.6%, Neutral - 77.2%, Underperform 6.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst: Meenu Goyal Lead Analyst: Supriyo Bose Content Editor: Supriyo Bose QCA: Supriyo Bose Reasons for Update: 4Q14 & FY14 Earnings Update Equity Research IEX Page 8