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IDEX Corporation Fundamental Analysis

Disclaimer: This article by The Globetrotting Investor is general in nature. We aim to bring you long-term focused analysis driven by fundamental data, hence, providing you commentary based on historical data and analyst forecasts only using an unbiased methodology. This is not a buy/ sell recommendation, and it is solely for educational purposes. Please do your research before investing. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Please read the full disclaimer here.

IDEX Corporation

Last Updated: 12 Jan 2024

NYSE: IEX

GICS Sector: Industrials

Sub-industry: Specialty Industrial Machinery

https://www.idexcorp.com 

IDEX Corporation Fundamental Analysis | IDEX Corporation Logo | Fundamental Analysis by The Globetrotting Investor

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Table of Contents

You can download a summary of  IDEX Corporation's fundamental analysis in PDF here.

Management

IDEX Corporation Management

CEO: Eric Ashleman

Tenure: 3.9 years

IDEX Corporation’s management team has an average tenure of 1.9 years. It is considered inexperienced.

Business Overview

IDEX Corporation Business Overview

IDEX Corporation, together with its subsidiaries, provides applied solutions worldwide.

 

The company operates through three segments: Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/ Diversified Products (FSDP).

 

IDEX structures its segments around how to best serve customer needs, with each segment comprising businesses that share product and end-market similarities, as well as common distribution methods and production processes. This structure enables management efficiency.

 

Within its three reportable segments, the company maintains 13 reporting units:

IDEX Corporation 13 Reporting Units

IDEX Corporation 13 Reporting Units. Source: IDEX Corporation 10K

Fluid & Metering Technologies

 

The FMT segment produces pumps, valves, flow meters, and related fluid-handling modules for various industries, providing flow monitoring and related services.

 

An example is ADS Environmental Technologies Inc., one of its subsidiaries, which provides comprehensive integrated solutions enabling industry, municipalities, and government agencies to analyze and measure the capacity, quality, and integrity of wastewater collection systems.

 

FMT offers application-specific solutions for end markets such as industrial infrastructure, energy, chemical processing, agriculture, and other speciality niche markets.

 

Health & Science Technologies

 

The HST segment supplies precision fluidics, pumps, drying systems, sealing solutions, hygienic mixers, valves, medical devices, and air compressors.

 

HST serves diverse end markets including food and beverage, life sciences, pharmaceuticals, research, and aerospace/ defense.

 

An example is IDEX Optical Technologies, one of its subsidiaries, which offers polarization optics, lenses, shutters, and optical subsystems to markets like semiconductor metrology and additive manufacturing.

 

Fire & Safety/ Diversified Products

 

The FSDP segment produces firefighting equipment, including pumps, valves, controls, rescue tools, and lifting bags.

 

They supply components for the fire, rescue, and speciality vehicle markets, serving OEMs and public/ private fire and rescue organizations.

 

Additionally, it provides stainless steel banding for industrial applications and precision equipment for dispensing, metering and mixing colorants and paints used in retail and commercial businesses worldwide.

 

The following table summarizes the percentage of total IDEX sales generated by each end market: 

IDEX Corporation Revenue End Market Breakdown FY2022 include fire and safety, energy and chemical.

IDEX Corporation Revenue End Market Breakdown FY2022. Source: IDEX Corporation 10K

IDEX Corporation Reportable segments include Fluid & Metering Technologies (FMT), Health & Science Technologies (HST), and Fire & Safety/ Diversified Products (FSDP).

IDEX Corporation Reportable Segment Revenue FY2022. Source: Gurufocus

Trends, Competition, and Strategy Overview

IDEX operates in competitive markets where key factors include product quality, design, engineering capabilities, development, adherence to customer specifications, post-sale support, delivery speed, and the efficiency of distribution channels.

 

The principal competitors of the FMT segment are the Pumps Group of Dover Corporation and Ingersoll Rand’s Precision and Science Technologies (PST) division. 

 

IDEX’s principal competitors of the HST segment are the Thomas division of Ingersoll Rand; Valco Instruments Co., Inc.; Jenoptik; and Tecan Trading AG.

 

The principal competitors of the FSDP segment are Waterous Company, a unit of American Cast Iron Pipe Company; Holmatro, Inc.; Corob S.p.A.; and Panduit Corporation.

 

To compete effectively, IDEX’s primary focus will be on:

  • Foundational execution. The company plans to refocus on its operating model to enhance efficiency, innovation, and growth. It aims to use its fundamental business practices for above-market growth and operational excellence as market conditions evolve.

  • Building great global teams. The company wants to focus on talent development for future growth. They onboard leaders committed to IDEX's core values.

  • Capital deployment. IDEX invested $1.5 billion in growth opportunities over the past two years. It plans to keep identifying both organic and inorganic opportunities, expecting a high-quality pipeline for potential acquisitions. 

IDEX Corporation Trends, Competition, and Strategy Overview

IDEX Corporation Economic Moat

IDEX Corporation Economic Moat

There are many ways to identify IDEX Corporation’s economic moat, but I focus on these 5 sources. The rating is purely subjective and is based on my in-depth understanding of the company. 

IDEX Corporation has a narrow economic moat. This is based on its intangible asset, cost advantage, efficient scale, network effect and switching cost.

IDEX Corporation Economic Moat 

Economic Moat: Narrow

 

IDEX’s narrow economic moat stems from its customer switching costs and intangible assets.

 

IDEX sets itself apart by actively engineering a range of highly specialized products for various niche markets. These products play a crucial role in high-stakes environments.

 

For instance, Band-It fastening solutions secure submarines, and space shuttles. Hurst Jaws of Life, on the other hand, rescues people from car accidents. Any product failures could result in costly disruptions, safety risks, or even loss of life. IDEX's enduring reputation for quality and safety record maintains customer loyalty in these demanding applications with minimal room for error.

 

Moreover, as IDEX's equipment is often a small part of a customer’s cost but is vital, customers resist switching to cheaper yet less proven options. The possible costs of failure, like unexpected downtime and safety issues, could be more significant than any potential savings.

 

New entrants have tried to tap into aftermarket sales in generic industrial markets. However, IDEX is as less susceptible to new entrant threats because it operates in niche markets. Its intricate and customizable parts are challenging to replicate.

 

The high-mix and low-volume nature of its business also serves as a barrier, demanding competitors to match IDEX's extensive portfolio and replicate its customer and distributor relationships to compete effectively at the necessary scale.

 

IDEX’s narrow moat relies on intangible assets like brands, a patent portfolio, and a reputation for quality. The company maintains adequate R&D spending and its innovation has allowed it to gain market share through new and improved products. An example is the 2019 SAM Control System introduction, which simplifies a firetruck's water flow management.

IDEX Corporation Performance

IDEX Corporation’s Performance

Ben’s quick performance checklist:

Has IDEX Corporation's revenue consistently grown year over year for the past 5 years? Yes.

Is the net income consistently increasing year over year for the past 5 years? Yes.

Has the cash flow from operating activities shown consistent year-over-year growth for the past 5 years? Relatively flat.

Has the free cash flow remained positive for the past 5 years? Yes.

Is the gross margin % consistent or growing over the past 5 years? Relatively consistent.

Has the EPS shown growth over the past 5 years? Yes.

Some key business unit performances include the Pumps reporting unit which demonstrated strong organic sales, driven by increased demand and successful price capture in the industrial and energy markets.

 

The Energy reporting unit also saw growth from a continued rebound in the refined fuel, liquefied petroleum gas, and aviation markets.

 

Similarly, the Scientific Fluidics & Optics reporting unit experienced increased organic sales driven by robust demand in analytical instrumentation and life sciences markets.

 

In 2022, IDEX did not experience any customers accounting for more than 3% of net sales. Due to the company's broad market diversification, significant customer concentrations were not observed.

 

Even though the sales volume, inflation, and acquisitions raised the cost of sales, IDEX managed to keep its profit margin consistent. This is due to higher volume leverage, favorable price/ cost, and productivity, along with accelerated deferred revenue from exiting a COVID-19 testing application.

 

Gross profit also rose due to acquisitions (net of the Knight divestiture), with a partial offset from an unfavorable impact of foreign currency translation.

IDEX Corporation's financial performance which includes its revenue, net income, operating cash flow, and FCF over the recent 5 years.

IDEX Corporation Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

 

Has free cash flow per share increased over the last 5 years? Relatively flat.

IDEX Corporation's free cash flow per share has been relatively flat for the past 5 years.

IDEX Corporation FCF per Share

IDEX Corporation Management Effectiveness

Management Effectiveness

Has IDEX Corporation's ROE stayed within or above the 12%-15% range year over year for the past 5 years Yes.

IDEX Corporation's ROE is above its industry average ROE.

IDEX Corporation Return on Equity

 

Has the ROIC stayed within or above the 12%-15% range year over year for the past 5 years? Yes.

IDEX Corporation's ROIC is more than its WACC. The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.

IDEX Corporation Return on Invested Capital vs Weighted Average Cost of Capital

On 17 Mar 2020, the company’s Board of Directors approved an increase of $500.0 million in the authorized level of repurchases of common stock.

 

This approval is in addition to the prior repurchase authorization of the Board of Directors of $300.0 million on 1 Dec 2015. These authorizations have no expiration date.

 

As of 31 Dec 2022, the amount of share repurchase authorization remaining was $563.8 million.

The number of IDEX Corporation shares outstanding has been declining over the past 5 years.

IDEX Corporation Shares Outstanding (Million Shares)

IDEX Corporation Financial Health

IDEX Corporation Financial Health

IDEX Corporation balance sheet which includes total equity, total debt, and cash & short-term investments.

IDEX Corporation Financial Health (USD Million)

Current Ratio: 3.1 (pass my requirement of >1.0)

Debt-to-EBITDA: 1.5 (pass my requirement of <3.0)

Interest Coverage: 14.5 (pass my requirement of >3.0)

Debt Servicing Ratio: 7.6 (pass my requirement of <30.0%)

IDEX Corporation Stock Performance

The following table compares total stockholder returns over the last five years to the S&P 500 Index, the S&P Midcap Industrials Sector Index, and the Russell 2000 Index assuming the value of the investment in the company’s common stock and each index was $100 on 31 Dec 2017.

 

Total return values for the company’s common stock, the S&P 500 Index, the S&P Midcap Industrials Sector Index, and the Russell 2000 Index were calculated on cumulative total return values assuming reinvestment of dividends.

IDEX Corporation Stock Performance
IDEX Corporation stock performance against its respective benchmarks.

Stock Performance. Source: IDEX Corporation 10K

IDEX Corporation Intrinsic Valuation

IDEX Corporation Intrinsic Valuation

Estimated intrinsic value: USD $127.44

 

Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.

Average free cash flow used: USD $530M

Projected growth rate: 7% - 10%

Beta: 0.9

Discount rate: 7.8%

Ideal margin of safety: 30% (Uncertainty: Mid)

Price range after the margin of safety: <USD $89.00

Date of calculation: 12 Jan 2024

IDEX Corporation's valuation is based on the discounted cash flow method. A fundamental analysis by Ben, The Globetrotting Investor.

IDEX Corporation Valuation

I use the past 5 years' free cash flow and apply a weighted average, giving more focus on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.

The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.

IDEX Corporation estimated fair value and its 52-week range.

IDEX Corporation Intrinsic Valuation

IDEX Corporation Relative Valuation

IDEX Corporation Relative Valuation

Comparison of IDEX Corporation's price-earnings ratio against its five closest industry peers.

IDEX Corporation's Price-Earnings Ratio vs its peers

IDEX Corporation price-earnings ratio for the past 5 years and its 5-year average.

IDEX Corporation Historical Price-Earnings Ratio

Additional Resources

I recommend reading University of Berkshire Hathaway as it greatly helps in my stock analysis. If you want a complete collection of recommended books, please visit here.

My Concerns

My Concerns

IDEX plans to grow through acquisitions, aiming to expand into new markets and strengthen its position worldwide. However, there are risks involved.

 

The company may face challenges in identifying suitable candidates, negotiating terms, securing financing, and successfully integrating acquired businesses. There is also the possibility that the integrated acquisitions may not perform as expected or be beneficial.

 

Past acquisitions have led to increased indebtedness and expenses, and this trend may continue in the future.

 

Another risk is the slowdown in the U.S. and global economy which could harm the company's business.

 

In 2022, 52% of sales came from domestic operations, and 48% from international operations. If there is a slowdown, especially in these specific markets, it could decrease the company's sales and profitability.

 

Considering IDEX for investment reveals a company with a narrow economic moat, suggesting a competitive advantage. The company has maintained satisfactory performance and displayed prudent capital allocation. Its healthy balance sheet indicates financial stability.

 

Prudent investors might seek a margin of safety of at least 30%, considering potential uncertainties in the market. This cautious approach ensures a buffer against unforeseen challenges.

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