IDEX: Order Moderation Illuminating A Path Forward (NYSE:IEX)

Nordroden/iStock via Getty Images I highlighted IDEX’s (NYSE:IEX) weak growth in Health & Science Technologies segment in my previous coverage published in February 2024. The company released its Q1 FY24 result on April 23rd and reaffirmed its full-year guidance. While I acknowledge that the Health & Science Technologies will continue to face challenges in FY24, IDEX’s order growth has already started to moderate. I reiterate ‘Buy’ rating with a fair price target of $220 per share. Order Moderation In Q1 FY24, IDEX experienced a 6% decline in organic revenue and 1% decline in orders, as illustrated in the chart below. My biggest takeaway is that the order moderation indicates an initial recovery in end-markets, as well as the completion of inventory destocking. IDEX Quarterly Results Specifically, the Fluid & Metering Technologies business declined by 3% in revenue, Health & Science Technologies dropped by 13%, and Fire & Safety/Diversified Products increased by 2% organically. The order moderation is primarily attributed by several factors: As communicated over the earnings call, IDEX has experienced some recoveries in its core industrial and municipal markets after a longer than expected inventory destocking. For Fire & Safety/Diversified Products business, IDEX delivered $14 million order growth from Q4 FY23 to Q1 FY24. The management indicated that half of the order growth was because of the blanket sales from large customers. In Fluid & Metering Technologies segment, IDEX’s order increased by $28 million sequentially, driven by increasing municipal projects. As indicated in my previous coverage, IDEX owns a collection of brands, distributing pumps and valves to agriculture, energy, and municipal customers. In my view, the order growth in Fluid & Metering Technologies indicates a modest market recovery in core industrial and municipal markets. As the order growth is a leading indicator of future revenue growth, IDEX’s business is more likely to bottom out in the coming quarters, in my view. FY24 Outlook IDEX reiterated the full-year guidance of 0%-2% organic revenue growth, anticipating an end-market recovery in the second half of FY24. IDEX Quarterly Result As shown in the pie chart below, IDEX has a broad range of end-market exposures , making it challenging to forecast revenue growth on an individual end-market level. IDEX Investor Presentation I estimate IDEX’s growth in two different ways: I think 3M (MMM) is a good proxy for the overall safety & industrial market. In their latest earnings call, 3M’s management anticipated its safety & industrial market growth will be flat to LSD in FY24. 3M also expressed that the inventory levels have been reducing in the channels, suggesting an improving supply chain situation. However, dealers and end-customers remain cautious amid the challenging macro environment. Using 3M’s market forecast as reference, I anticipate IDEX will deliver LSD revenue growth in FY24. Another approach is to monitor the Industrial Production Index. According to KPMG’s latest report, Industrial production increased by 0.9% sequentially in May, beating expectations of 0.4%. It is worth noting that industrial production growth was flat in March and April. The rebound in production could possibly benefit overall industrial demands. It is inevitable that the channel inventory destocking is nearing its end, and the manufacturing output recovery is propelled by consumer goods demands. Therefore, I anticipate IDEX’s business will begin to recover in the second half of FY24. Assuming IDEX will deliver -2% organic revenue growth in Q2, 4% in Q3 and 8% in Q4, I expect IDEX to achieve 3.5% organic revenue growth in FY24. Valuation Revision As pointed out in my previous coverage, M&A is an important growth driver for IDEX. Over the past five years, M&A deals have contributed an average of 4% to the topline growth. I assume IDEX will allocate 10% of total revenue towards acquisitions, contributing 3.3% to overall revenue growth. As discussed previously, I anticipate the overall industrial market is nearing the bottom of its cycle, with a potential recovery likely from FY25. Given IDEX’s focus on niche industrial products, the company holds strong pricing power over its customers. I anticipate the company will continue to raise price by 3% annually. In addition, I assume IDEX’s volume growth will outpace overall industrial production growth as the company continues to gain market share from smaller players. Assuming 3% pricing growth and 4% volume growth, the organic revenue growth is predicted to be 7% from FY25 onwards. I assume IDEX can deliver 30bps operating margin expansion per year, driven by 20bps gross margin improvement from new product launch with higher ASP, and 10bps operating leverage from sales and marketing expenses. IDEX DCF – Author’s Calculations The WACC is calculated to be 8.9% assuming: risk-free rate 4.25% (US 10Y Treasury Yield); beta 0.84 (Seeking Alpha); equity risk premium 7%; cost of debt 7%; equity balance $3.5 billion; debt $1.3 billion; and tax rate 23%. Discounting all the free cash flow, the fair value is estimated to be $220 per share. Key Risks I think the biggest risk for IDEX is the macro environment. If the Fed delays the interest rate cut in 2024, it will possibly put more pressure on the overall industrial productivities. Currently, the market anticipates a recovery in the industrial market in the second half of FY24. However, if industrial production remains weak during this period, it could pose significant risks to IDEX’s stock price. End Notes It is highly likely that IDEX’s business is at the bottom of the industrial cycle, and I anticipate its business will start to recover from the second half of FY24. The order moderation is a strong indicator for a revenue rebound in the near future. IDEX is a quite niche player in the industrial market, possessing strong pricing power and leading market share. I reiterate ‘Buy’ rating with a fair price target of $220 per share.

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