Chuck Akre, the famous value investor, has managed to generate a sweet annualized return of 11.2% in the past ten years, nearly four times higher than the S&P 500’s annualized return of only 3%. Chuck Akre loves to purchase quality businesses, which have the potential to compound capital at very high rates. In the first quarter of 2013, he increased his positions in Colfax by nearly 33% to more than 1.6 million shares. As of March, Colfax accounted for 4.3% of his total portfolio. Is Colfax a good investment opportunity? Let’s find out.
Colfax is considered a global provider of fluid-handling and fabrication technology under several brands including Howden, ESAB and Colfax Fluid Handling. The company operates in two main business segments: gas and fluid handling and fabrication technology. Most of its revenue, $2 billion, or nearly 50% of the total 2012 revenue, was generated from the fabrication technology segment while the gas and fluid handling segment contributed $1.9 billion in revenue. However, gas and fluid handling enjoyed the higher operating margin at 7.4%, whereas the operating margin of the other segment was 7%. In 2012, Colfax produced a loss of $83.3 million, or a loss of $0.92 per share. The loss was mainly due to the restructuring and other related charges of more than $60 million and the provision for income taxes of more than $90.7 million.
The 2012 cash flow was still positive. The operating cash flow came in at $164 million while the free cash flow was $81 million. Colfax does not leverage a lot in its operations. As of March 2013, it had $1.82 billion in equity, $235 million in cash and $1.53 billion in debt. What I am worried about is the company's huge goodwill and intangible assets of nearly $2.73 billion. Thus, the tangible equity was negative at $910 million. Colfax recently hit a new 52-week high at over $50 per share, with a total market cap of around $4.6 billion. The market seems to value Colfax quite expensively at 12.80 times EV/EBITDA.
Ampco-Pittsburgh is the cheapest valued
Compared to its peers including Ampco-Pittsburgh and Flowserve Corp , Colfax has the highest valuation among the three. Ampco-Pittsburgh's hostory dates back to 1929. It operates in two main business segments: Forged and Cast Rools and Air and Liquid Processing. The majority of its revenue, $189.5 million, or 64.7% of the total revenue, were generated Forged and Cast Rolls segment while the Air and Liquid Processing generated nearly $103.5 million in 2012 revenue.
In the first quarter 2013, Ampco-Pittsburgh’s revenue has decreased, from $73.6 million last year to more than $69.6 million. The net income dropped significantly by 93.7%, from $2 million to $126,000. The decline in the net income was due to the lower revenue, higher other expense and higher equity losses in its Chinese joint venture. Ampco-Pittsburgh is trading at around $19 per share, with the total market cap of nearly $200 million. The market values the company cheaply at only 5.3 times EV/EBITDA.
Flowserve – double digit return with increasing dividends
The largest company among the three is Flowserve, with the total market cap of $8.10 billion. At $169.90 per share, the company is valued a bit cheaper than Colfax at 11.78 times EV/EBITDA. Flowserve is considered the global leading provider of flow control products and services for the global infrastructure industry. At the beginning of April, Flowserve reported that it has received a multi-million dollar order for the supply of pump package and energy recovery devices for the desalination plant in Cyprus. That multi-million dollar was from M.N. Larnaca Desalination, a join venture between Israeli Mekorot Development & Enterprise and Netcom Limited of Cyprus. Jim Quain, the President of Flowserve Engieenred Product Operations said: “Flowserve's proven track record for efficiency and reliability of our high-pressure pumps and Calder DWEERs, along with a low overall cost of ownership and an experienced global project management team, were major considerations in being awarded this order."
What makes me like the Flowserve is its consistent increasing dividend payment since 2007. The dividend has risen from $0.60 per share in 2007 to $1.44 per share in 2012. Interestingly, the dividend policy of Flowserve seems to be quite conservative. For the past six years, the dividend payout ratio has been quite low, fluctuating in the range of 12.9% to 16.9%. At the current trading price, the dividend yield of Flowserve stays at 1%.
My Foolish take
Among the three, I like Flowserve the most with its market leading position, reasonable valuation and double digit return on invested capital at nearly 14.90%. Moreover, Flowserve could comfortably raise its payout ratio to boost the dividend yield and increase the cash return to its shareholders.
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