Maksim Labkouski
In the summer of 2021, I believed there was little imminent appeal for shares of IDEX (NYSE:IEX) as the long term value creator announced its next bolt-on M&A deal at the time. Ever since the company has seen solid organic performance, accompanied by the occasional bolt-on deal making, as a modest pullback in the shares has improved appeal, just not yet to trigger my interest.
A Quick Recap
When I looked at IDEX last year, the company was a $2.4 billion supplier of highly engineered industrial and technology solutions, typically used in mission-critical niches. These market segments create competitive moats for the business, a key contributor to drive long term superior performance.
The company is a diversified business in terms of geographical areas as well as industry verticals, which includes fire & safety, energy, life sciences, water, analytical instruments, chemical, food & pharma and other end markets. Besides a focus on moats and niche segments, as well as diversified operations, it is the culture of decentralized management teams which hold themselves accountable being a key driver of the success.
IDEX posted a 6% decline in 2020 sales to $2.4 billion as adjusted earnings fell to $5.19 per share, with year-over-year declines being the result of obvious reasons of course. The company guided for a recovery in 2021 with sales seen up 6-8% and earnings seen around $5.80 per share, and even as the company hiked the guidance throughout the year, valuations were far too demanding for me.
After all, shares of IDEX had risen to $220 when the company announced a $470 million deal to acquire valve manufacturer Airtech Group, a bolt-on deal for a company with the valuation of $17 billion at the time. With the net debt far from being an issue, the issue was that earnings power of just above $6 per share left little room for any appeal at a near 40 times earnings multiple.
Consolidation
Being mindful of the too high valuations in the summer of last year, shares initially rallied to a high of $240 per share, fell to $180 this summer amidst concerns about growth, but moreover dollar strength and higher interest rates which hurt valuations. Ever since, shares have recovered despite jittery trading action in recent weeks, with shares now trading at $205, marking just very modest losses from the summer of last year.
The company has seen strong operational performance in the remainder of 2021 and in November, IDEX announced a $120 million deal to acquire Nexsight, adding water expertise and $50 million in sales at a relative compelling sales multiple. Following solid operating momentum, IDEX posted strong 2021 results with revenues up 18% to $2.8 billion as two-thirds of this growth was achieved on an organic basis.
GAAP earnings rose nearly a dollar to $5.88 per share as adjusted earnings per share came in at $6.30 per share as the list of reconciliation items looked fair. Despite the deal making, net debt of $335 million is very modest with EBITDA trending at around three quarter of a billion. With the company guiding for another 5-8% increase in sales in 2022 and adjusted earnings seen at a midpoint of $7.48 per share, the forward adjusted earnings guidance has fallen to 27 times earnings based on the current price.
The company announced a next bolt-on deal this spring with the purchase of KZVale. While no purchase price has been announced, a $28 million sales contribution reveals a pro forma contribution equal to 1% of total sales. Following a strong second quarter, the company actually hiked the full year guidance alongside the first quarter earnings report, and hiked the adjusted guidance to $7.93 per share following the second quarter earnings report as released in July.
This improved expected earnings power has reduced the forward earnings multiple to 26 times. Net debt of $632 million inched up following some deal making, as well as dividends and share buybacks, still far below the EBITDA contribution, trending around $850 million per year. Given this, the enterprise value of IDEX just topped $16 billion, or just over 5 times sales.
Another Bolt-On Deal
In September, IDEX announced its next deal, this time announcing an EUR 700 million deal to acquire Dutch-based Muon Group. With the exchange rates essentially trading around parity, the deal comes in around $700 million, equivalent to around 4-5% of the current own valuation. Pro forma net debt of $1.3 billion is still perfectly manageable, but increases leverage to around 1.5 times.
Muon produces precise flow paths which enable the movement of liquids and gasses in a wide range of high value applications. The deal is set to add EUR 140 million in sales, revealing that a 5 times sales multiples has been paid which comes in a touch below the own valuation. With EBITDA margins of 33% this results in an EUR 46 million EBITDA contribution which reveals that 15 times multiple has been paid on that front. The deal looks okay as leverage is far from an issue and beside the slightly lower sales multiple comes the fact that Muon reports slightly higher margins as well.
Assuming modest accretion, pro forma earnings could top $8 per share, although that the softening economic conditions and dollar strength cause some doubts on that. Amidst all this, valuations have significantly improved, yet on the other hand, market jitters have appeared left and right.
Hence, I am still very impressed with the business and its performance. And while earnings multiples have compressed significantly, I am seeing greater appeal than I did last year. Yet with alternatives looking more compelling by the day, I am getting more constructive on IDEX, just not pulling the trigger yet, despite a solid recent bolt-on deal.
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