Company: Colfax Corp. (CFX)
Companies: Colfax is a globally diversified technology company. The company operates in two segments: (i) manufacturing technology: consumables and equipment, including cutting, joining and automated welding products and gas control equipment; and (ii) medical technology: medical devices for the treatment of patients with musculoskeletal disorders due to degenerative diseases, deformities, traumatic events and sports injuries. It offers rigid and soft orthopedic bandages, heat and cold therapy products, bone growth stimulators, vascular therapy systems and compression garments, therapeutic shoes and insoles, electrical stimulators for pain management, and physiotherapy products; and a range of reconstructive joint products.
Market value: $ 7.3 billion ($ 51.62 per share)
Activist: Starboard
Percentage ownership: n / A
Average cost: n / A
Comment from the activists: Starboard is a very successful activist investor and has extensive experience in operational activism helping boards and management teams run businesses more efficiently and improve margins. You have made 103 13D submissions. In those 103 submissions, they achieved an average return of 33.4% versus 14.1% for the S&P 500. Their average 13D hold time is 18.2 months.
What’s happening?
Starboard has taken a position with the company, supporting management’s plan to split into two businesses, but sees additional opportunities to add value by improving margins.
Backstage:
Colfax consists of two separate businesses: (i) a manufacturing technology segment (“FabTech”), which accounts for 2/3 of the Company’s sales, producing filler metals and welding machines, and (ii) a medical technology segment (“MedTech”) which accounts for 1/3 of sales and manufactures medical devices such as joint replacements and braces. FabTech is number one in the industry in many regions around the world and is expanding its market share in North America. MedTech has the largest market share in prevention and rehabilitation and is gaining market share in the reconstructive market.
These are two great companies that, logically, do not belong together. And the company announced in March of this year that it will split the two businesses and expects to do so in the first quarter of 2022. This alone should create value for shareholders as the two separate management teams can focus on their core competencies. FabTech’s main competitor is Lincoln Electric, and while it can be argued that a standalone FabTech should trade at a multiple higher than Lincoln Electric, it should certainly trade at least the same multiple, giving a valuation of $ 5.4 billion. Dollar would result. This would assign the MedTech business a valuation of $ 3.7 billion, which is a 2-fold sales multiple and 13-fold EBITDA multiple versus 4-fold and 13-fold EBITDA multiple, respectively.
The second way to add value is to close this valuation gap by focusing on margins and growth. In this business, revenue growth plus EBITDA margin should be or exceed 30 as the median for the competitors is 30, with the best of the competitors in the high 30s. MedTech is at the lower end with 23.5%. Because MedTech has a similar gross margin to its competitors, this is a selling, general, and administrative expense issue.
Starboard has an extensive track record of helping businesses improve operating margins. This is exactly what the company recently did with a similar company, Merit Medical, and achieved a return of 113% in less than two years versus 36% for the S&P 500. Reducing the overhead here would not only improve margins, it would improve the company also make it possible to invest in growth. Here, too, the company agrees and has announced an EBITDA target of 25% for the MedTech business. Starboard believes this focused margin improvement plan could be accelerated, just as Merit Medical has done. Adjusted for these margin improvements, an independent MedTech would be traded with 10 times EBITDA compared to 19 times its competitors. Closing this valuation gap would result in a stock price of $ 76 in 2023 and a stock price of $ 94 in 2025.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.
