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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’s Performance

Ben’s quick performance checklist:

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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.

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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.

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