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Company: Colfax Corp. (CFX)
a job: Colfax is a diversified global technology company. The company operates in two divisions: (1) manufacturing technology: consumer products and equipment, including robotic welding, cutting, and gas control equipment; and (ii) Medical Technology: Medical device products used to treat patients with diseases of the musculoskeletal system resulting from degenerative diseases, deformities, traumatic events and sports injuries. Offers soft and rigid orthotics, hot and cold therapy products, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and inserts, electrical stimulators used for pain management, and physical therapy products; and a range of reconstructive joint products.
stock market value$7.3 billion ($51.62 per share)
Activist: Starboard Value
ownership percentage: unavailable
average price: unavailable
Activist comment: Starboard is a highly successful active investor with extensive experience in operational activity helping boards and management teams run companies more efficiently and improve margins. They have made 103 13d deposits. In those 103 orders, they generated an average return of 33.4% versus 14.1% for the S&P 500. Their average waiting time of 13D is 18.2 months.
What is happening?
Starboard has taken a position in the company and supports management’s plan to split into two companies but sees an additional opportunity to create value through improved margins.
behind the scenes:
Colfax is comprised of two separate companies: (1) the Manufacturing Technology (“FabTech”) segment, which comprises two-thirds of the company’s revenue and manufactures filler metals and welding machines, and (2) the Medical Technology segment (“MedTech”), which accounts for one-third of the revenue and manufactures medical devices such as joint replacements. and brackets. FabTech is the number one player in the industry in many regions internationally and is expanding its market share in North America. MedTech holds the first market share in the field of prevention and rehabilitation and winning the share in the restoration market.
These are two great works that do not logically belong together. The company announced in March of this year that it would separate the two companies and expects to do so in the first quarter of 2022. This alone will create shareholder value as the two separate management teams can focus on their core competencies. FabTech’s main counterpart is Lincoln Electric, and while an argument can be made that standalone FabTech should trade at a higher multiplier than Lincoln Electric, it certainly should be trading at at least the same multiplier, giving it a valuation of $5.4 billion. That would attribute a $3.7 billion valuation to MedTech, which is twice the revenue multiplier and the EBITDA multiplier of 13 times versus 4x and 19x, respectively, for its peers.
So, the second opportunity to create value is to close this valuation gap by focusing on margins and growth. In this business, revenue growth plus EBITDA margin must equal or exceed 30, as peers average 30, with best peers in their 30s. MedTech is bottom at 23.5%. Since MedTech has similar gross margin to its peers, this is a matter of general selling and administrative expenses.
Starboard has a proven track record of helping companies improve operating margins. The company recently did exactly that at a similar company, Merit Medical, where it generated an 113% return in less than two years versus 36% for the S&P 500. Cutting excess costs here would not only improve margins, but allow the company to invest in growth. Once again, the company agreed to this and announced a 25% EBITDA target for MedTech’s business. Starboard believes this margin improvement plan can be accelerated with Focus, just as Merit Medical has done. After adjusting for these margin improvements, independent MedTech will trade at a rate of 10x EBITDA versus 19x for its peers. Closing this valuation gap will result in a share price of $76 in 2023 and a share price of $94 in 2025.
Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activity, and founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in 13D’s active portfolio.