Asmus Puhl Finance Blog

Colfax is intensifying its presence in the middle east oil production market:

http://ir.colfaxcorp.com/releasedetail.cfm?ReleaseID=389586

… this is just another little step in positioning itself in a growth region. It is done by its already strong Allweiler division.

I am curious in what sector they will do the next acquisition!

So far in 2008 and at the beginning of 2009 we have witnessed one of the most severe bear markets of all times as we were near the collapse of the financial system and we saw the beginning of a severe worldwide recession.

Since March 2009 the stock market recovered from its all time lows.

So, is the worst over? Is this the beginning of a substantial market recovery or is it a bear market rally and will we see another severe market correction?

The problem is:

predict the short time gyrations of the stock market is next to impossible.

A lot of experts and economists recently predicted another correction, but the market moves up slowly or holds steady.

An intelligent forecaster once said to Peter Lynch: „If you must forecast, forecast often!“

(cited from „One up on Wall Street“)

Certainly, a partial market sell off caused by window dressing activities of investment funds before the HY 2009 deadline of June 30th is possible.

But otherwise there is still a lot of institutional money waiting on the sidelines to be reinvested in the stock market.

So please follow the best possible advice:  Do not ask!

• Invest in companies not in the stock market.

• Invest for the long term.

• Do your due diligence and buy quality companies at reasonable prices.

But anyway, if you are interested in market timing why don’t you start looking at companies with cyclical businesses?

Even the most severe recession will end some day and the stock market is a leading economic indicator:

it generally starts rising about 6 months before the end of a recession!

Be prepared!

Yesterday Colfax’s stock (NYSE: CFX) traded at $ 8.35

Shares outstanding are 43.21 mil which translates into a market capitalization of $ 362 mil.

Analysts expect Colfax to grow 7% over the next years.

Danaher’s growth rate over the past 10 years was 17.5%

I think that after a difficult year 2009 we can be slighty more optimistic than analysts and expect Colfax to grow at an 10% annual rate.

I would expect Colfax to acquire at least one company per year.

They have a strong balance sheet and with the economy in recession smaller companies will certainly be available at good prices. This should make acquisitions immediately accretive to earnings.

And don’t forget that Colfax’s earnings are still impacted by asbestos liabilities. It costs them about 40% of their earnings power this year.

But those costs should rapidly decline over the next years.

Management expects EPS this year in the range of $ 1.00 – 1.07 excluding the asbestos liabilities and costs.

So with a 10% annual growth rate the company should at least earn $ 1.61 / share within 5 years.

At a conservative p/e ratio of 10 this means the share price should roughly double to $16.10 (I don’t expect a significant dilution of shareholders given the strong insider holdings).

I think at today’s prices we are able to invest in a very promising company with a significant margin of safety!

……..this blog will continue to keep an eye on Colfax!

Colfax Corporation published a new investor presentation on its website:

http://ir.colfaxcorp.com/events.cfm

It gives a comprehensive and detailed view of the company.

It’s worth reading!

So let’s have a look at Colfax’s numbers:

FY 2008:

Colfax sales in FY 2008 grew 20% to 605 $mil.

Excluding the impact of foreign exchange rate fluctuations and acquisitions sales grew 14% in 2008, 14% in 2007 and 12% in 2006.

So we already have a string of sales increases which are similar to what Danaher achieved over the last 10 years: 17.5% average annual top line growth.

In 2008 the company had to absorb one time IPO costs and build up inventory. So it swung to a net loss and free cash flow got tied up in these inventory increases.

But don’t forget that IPO costs are really one time costs and that the proceeds of the IPO were used to pay down debt. So at the end of FY 2008 the company had a healthy debt/equity ratio of 0.58.

Order levels increased 15% to 669 $ mil at the end of FY 2008 and EBIT-margin adjusted for one time events was 15%.

Certainly at the beginning of 2009 Colfax felt the impact of the recession and for the whole year 2009 economic conditions will remain difficult.

Q1 2009 still was order backlog driven: Colfax posted net sales of $ 136 mil, an increase of 4,3%. Organic sales growth which excludes the impact of foreign exchange rate fluctuations was 17,6%.

Net income came in at $ 6.9 mil or $ 0.16 EPS basic and diluted. But the company was free cash flow positive again.

Organic order decline was 25.5% and order backlog still was $ 305.6 mil.

The company lowered its guidance to $ 1.00 to $ 1.07 adjusted EPS for FY 2009 and initiated several cost reduction measures. Organic sales will be down between 2% and 4% this year.

……..continues………

Let’s start right away with a very interesting and still rather unknown small cap

(only 7 analysts are following this company at the moment / source yahoo finance):

Colfax Corporation  ( NYSE: CFX )

Website: www.colfaxcorp.com

Colfax was founded in 1995 in Richmond, VA, USA, and went public in May 2008.

It makes pumps, fluid handling systems, speciality valves for industrial, marine, oil and gas, and power generation markets, and for the Navy.

It has some of the best and most recognized brands in the industry worldwide and extensive engineering expertise. It works in some very attractive industrial markets. Just think of the future energy infrastructure needs especially in Asia.

Their net sales reached 605 mil $ in FY 2008.

Colfax is globally diversified:

51% of sales were in Europe, 25% in the US and Canada, and 15% in Asia and Australia, up from only 2.3% in FY 2007.

The current market capitalization is 311 $ mil.

Business Model:

Colfax works with a business model they call the Colfax Business System.

To understand this we have to look at the business model of another very successful company: Danaher Corporation (NYSE: DHR) website:www.danaher.com

Danaher was founded by Steven and Mitchell Rales in 1983. They started to acquire industrial businesses to form a conglomerate. By applying the principles of „kaizen“ the Japanese word for continuous improvement, they made the acquired companies much more efficient and profitable than they were before.

Exceed customer expectations, defining delivery performance, improvements in costs, innovation in products and services are the goals.

And they called it the Danaher Business System. They implemented this business model so well that they delivered an impressive annual return of 22% to shareholders since 1991.

Colfax follows this model and calls it the Colfax Business System. They are a serial acquirer of small complementary industrial businesses like Danaher.

Mitch Rales founded Colfax together with the actual CEO John Young in 1995.

He and his brother Steven today hold each 21% of Colfax stock.

Mitchell Rales serves as chairman of the board. Also board members are Patrick Allender, the longtime CFO of Danaher and Thomas Gayner, the chief investment officer of Markel Corp., one of the best investors in the US. Some talked of him even as a successor of Berkshire Chairman Warren Buffet.

So Colfax could evolve as a strong core business together with the implementation of its acquisition strategy, backed by the excellent expertise to value these acquisitions among their officers and board members

….continues with the financials….

This blog favors stock picking of small and midcap companies.

… so good….

but what are the criteria to evaluate a company?

For me four criterias are the most important:

Strong balance sheet, earnings power and cash flow

I would not invest in companies which have a debt loaden balance sheet or which even in good times do not generate strong cash flow. They would be too vulnerable in difficult times (as we can experience right now…..)

Certainly, a dividend can add nicely to the investment return over time but if a small fast growing company has better use internally for the money it should reinvest it in the business.

A sustainable competitive advantage:

The best companies to invest in are surrounded by a wide moat filled with crocodiles as Berkshire Chairman Warren Buffet puts it.

Those competitive advantages can be strong brands, patents, de facto standards, or low cost production processes which can not easily be duplicated by competitors.

Long standing good relationships with important clients belong here too.

These factors normally lead to above average earnings and cash flow power.

Honest Management:

This is perhaps the most difficult criteria to assess but the most important too!

I do like intelligent capital allocation (and not risky and exaggerated M&A activity), reasonable executive compensation (and not exaggerated option grant).

The perfect match is certainly when founders and/or executives are still large shareholders so the interests of them are more aligned with outside shareholders.

The share price is cheap

which can happen when p.e.

– the company already is a great business but so small that it is unknown and does not have the attention of many analysts,

– the company faces a temporary setback caused by bad news from its business or caused by a general negative stock market sentiment.

This blog not only favors stock picking over investing in funds but also favors investments in small and mid cap companies over large caps.

Why that?

There are generally speaking better return possibilities.

If you invest in a large cap company like p.e. Siemens (mkt.cap of € 46 bil) or in McDonalds (mkt.cap of § 59 bil) it is hard to imagine that the value of the company grows significantly more than the general GDP growth, if not there is a special situation like p.e. a turnaround or a temporary crisis.

Large caps are more interesting for dividend seeking investors because in most cases they offer a stable dividend which rises every year.

But small or midcap companies (we are talking about a market capitalization of 200 mil up to 1,5 or 2bil $ or €) can double, triple or even grow bigger than that. Some investors even made 10 or 20 times their money over time!

Certainly the risk that something goes wrong is significantly higher with small and mid caps, so it is recommendend that you diversify more. I think 10 is a minimum number of stocks you should invest in.

Most institutional investors often do not look at small caps.

If an investment fund is not specialized in small and mid caps its sheer size often makes it impossible to invest in stocks under a certain market capitalization.

Most small companies are only followed by few analysts too.

So there is a compelling chance for individual investors to discover promising companies that the stock market does not accurately price. Their intrinsic value can be much higher than their actual market price.

……..buy good underfollowed small companies and wait patiently until the market discovers their real value!

Gemessen von ihrem bislang absoluten Tief Anfang März diesen Jahres bis heute haben Bankaktien kräftig zugelegt:

(Kursdaten: Yahoo Finance)

Die Einstellung der Investoren gegenüber Bankaktien scheint sich geändert zu haben. Ist also das schlimmste der Krise bereits überstanden? Ist der Zeitpunkt gekommen, früh wieder einzusteigen, um ja nichts zu verpassen?

Wer jetzt überlegt, Bankaktien zu kaufen und sie zumindest auf mittlere Frist zu halten, muss sich wohl ein paar Fragen beantworten. Diese sind u.a.:

Wieviel wird die Bank in den nächsten Jahren verdienen und wie wird sie auf der Grundlage des heutigen Kurses bewertet?

Können wir erwarten, dass die Banken einfach so zu ihrer früheren Ertragskraft zurückkehren?

Die Bankerträge der letzten Jahre waren aufgebläht wie die Immobilienpreise in den USA, in Irland oder London. Ganze Geschäftsbereiche wie Handelsaktivitäten mit implodierten Wertpapieren oder komplizierten Derivaten sind zusammengebrochen und sie werden sich nicht wieder erholen, sei es weil die Banken sie freiwillig meiden werden, sei es, weil staatliche Regulierung es verhindern wird.

Die Bilanzen vieler Banken sind immer noch voll von Wertpapieren, über deren Wert man häufig weiterhin nur spekulieren kann. Schon in den goldenen Jahren konnten die Banker diese nicht richtig bewerten. Ist dies heute so viel besser?

Sicher ist die Geldaufnahme zur Zeit billig und neue Kreditvergabe sollte recht risikolos sein und die Zinsmarge ist hoch, aber viele Banken werden so saniert und umgebaut, dass man heute kaum weiss, in welchen Geschäftsfeldern sie in Zukunft tätig sein werden, geschweige denn, was sie dort verdienen werden.

Mit welchem Kapital werden die Banken in Zukunft arbeiten?

Die meisten Banken sind immer noch schwach kapitalisiert. Kommt frisches Kapital von privater Seite droht dem bestehenden Kapital der Verwässerungseffekt. Kommt das Kapital hingegen vom Staat, müssen ihm sicher Vorrangkonditionen eingeräumt werden. Es wird also nicht bei der Verwässerung bleiben.

Darüberhinaus besteht in eher staatsgläubigen Ländern Europas wie z.B. in Deutschland die Gefahr, dass sich der Staat nicht wieder aus einer Bank zurückziehen wird, damit Politiker weiterhin Einfluss nehmen können auf die Geschäftspolitik. Die Erfahrung zeigt, dass dies fast immer zulasten der Ertragskraft geht.

Ein jetziges Investment in eine Bank muss nicht unbedingt schlecht sein, aber es gibt Fragen, die wohl heute nur sehr vage zu beantworten sind.

Wir sind hier wohl eher im Bereich der Spekulation als des Investments!

Wiederherstellung des Vertrauens in den Märkten ist wichtiger als neue Gesetze und Aufsichtsregeln

In den USA haben der Chairman des Federal Reserve Bernanke und Schatzsekretär Geithner vor dem Kongress gefordert, dass der Regierung mehr Vollmachten verliehen werden, um intervenieren zu können, wenn Finanzinstitutionen, die nicht Banken im förmlichen Sinne sind, in Schwierigkeiten geraten.

Was ist hiervon zu halten?

Würde eine solche Massnahme helfen, die Finanzkrise, insbesondere die noch anhaltende Blockade des Kreditmarktes zu überwinden?

Natürlich ist es heute nach etwa 8 Monaten Finanzkrise klar, dass die Selbstregulierung im Nichtbankenbereich gescheitert ist. Hedge Funds, Versicherungskonzerne ausserhalb ihres eigentlichen Core Business u.a. hatten in unglaublichem Mass Risiken und Verschuldung aufgebaut.

Angst vor dem Zusammenbruch grosser Teile der Finanzbranche hatte kein Verantwortlicher und kein Marktteilnehmer. Die letzte systemweite Krise, diejenige der grossen Depression der dreissiger Jahre, lag ja schon viel zu viele Jahre zurück.

Bereits heute aber hat der Markt Selbstreinigungskräfte entwickelt!

Hedge Funds leiden doppelt sowohl unter dem Rückgang des Wertes ihrer Anlagen als auch unter Kapitalrückzügen ihrer Investoren und ihre Bedeutung ist stark geschrumpft.

Zwei übrig gebliebene Investmentbanken Goldman Sachs und Morgan Stanley sind Bank Holding Companies geworden und unterliegen damit jetzt der normalen US-Bankenregulierung. Viele sonstige Finanzgesellschaften sind verschwunden.

Viel wichtiger als neue Regulierungen scheint mir jetzt zu sein, dass wieder Vertrauen hergestellt wird an den Finanzmärkten!

Hierzu dürfen Banken, die wohl kaum überlebensfähig sind wie z.B. Citigroup nicht weiter mit Staatsgeld künstlich am Leben erhalten werden. Sie sind geordnet in Anwendung der bestehenden Regulierung abzuwickeln anstatt sie wie „Zombies“ herumlaufen zu lassen.

Sobald es nur noch Banken geben wird, die klar überlebensfähig sind, wird das nötige Vertrauen zurückkehren, das den Interbankenmarkt wiederbelebt. Dann werden auch die rekordhohen Summen, die zur Zeit an den Seitenlinien geparkt sind, wieder in den Aktienmarkt fliessen.

Im Augenblick scheint es, als ob die Selbstreinigungskräfte des Kapitalismus bereits effektiver am Werk sind als Staaten und Regierungen, auch wenn diese Kräfte eine gewisse Zeit benötigen!