Good returns are made in bad times

We buy good companies when they are cheap; this doesn’t happen when the world is merry. Therefore our magnifying glass focuses on where there is pessimism or - even better - full-blown panic. The current downturn in the oil and gas industry is just that.

There are opportunities in the oil and gas industry sell-off

Concerns around prolonged lower oil and gas prices have resulted in the shares of many related companies selling off. As invariably happens, some prices fall hopelessly too far. We believe this is the case for Colfax Corporation, a stock we have been introducing into the PSG Global Flexible Fund over the last number of months. Colfax is currently the 7th-largest holding in the fund.

Colfax Corporation: a solid, diversified business

Colfax is a US-based engineering company which consists of two distinct segments, Fabrication Technology and Gas & Fluid Handling. The Fabrication Technology business supplies about 12% of global welding equipment and related consumables. The Gas & Fluid Handling business is a supplier of high-tech equipment and parts including fans, pumps and compressors.

We look for robust profits that can grow

At PSG Asset Management we look to buy income streams which are reasonably robust and well-poised for growth. Colfax ticks both these boxes.

Robust profits

- The company’s customer base is diversified across many industries, including the oil and gas, power generation, marine, automotive and construction industries.
- Colfax has limited geographical concentration risk, with its largest single market (the US) contributing only 30% of total sales.
- A large portion of the company’s sales originate from aftermarket sales – which tend to be of a recurring nature.
- Profits that can grow.
- Just over 40% of Colfax’s sales originate from emerging markets.
- Colfax’s product range is generally about quality rather than price, which allows for at least nominal revenue growth.
- The company continues to drive significant efficiency improvements.
- The management team has a track record of earnings-enhancing bolt-on acquisitions.
Our 3M yardstick: how does Colfax stack up?

Moat

- The Fabrication Technology segment houses the ESAB brand. ESAB’s heritage dates back to 1904 and the invention of the welding process. ESAB is the largest player in a fragmented market, which allows for larger research and development spend (i.e. better product) and lower manufacturing costs. Seven out of ten welders change suppliers every year, but they hardly change away from ESAB.
- The Gas & Fluid Handling segment primarily consists of the Howden brand. Howden was founded over 150 years ago and focuses on being the market and technology leader in its various focus areas, which are mainly non-commoditised, niche industrial end markets.
- Besides its underlying subsidiaries having strong moats in their own right, we believe the real differentiating factor is Colfax Business Systems (CBS). This refers to a set of proprietary operational and management tools which focuses on continuous group-wide improvements. CBS serves as a propeller of growth as new acquisitions are plugged into a super-efficient and cross-selling system.

Management

For us every day is a treasure hunt for those exceptional management teams who have large personal investments in the companies they run. The hunt was called off early the day we found the Rales brothers.

The Rales brothers, who collectively own 19.6% of Colfax, are two of the best industrialists in modern US history. They really made their mark with Danaher, an industrial company which they founded back in 1984. Danaher has been a phenomenal success story which has rewarded long-term shareholders with a compound annual total return in excess of 20% over the last three decades. Danaher is all about astute acquisitions and a culture of continuous efficiency improvements. Colfax, which they founded in 1995, unsurprisingly has the very same foundation.

Margin of safety

We’re thankful for the ‘industrial recession’, which has resulted in a lack of interest in this stock. We were able to add to the Colfax holding at a free cash flow yield of close to 10% during the first quarter, a steal in our view.

Colfax is a thoroughbred selling at half-breed prices, or a good horse bought in bad times.