If you’ve been an investor, or a student of economics, for any amount of time, you’ll have heard of more than a few “cycles”. The business cycle, the economic cycle, the interest rate cycle, seasonal cycles, the election cycle…and on and on and on.
These cycles have become indicators, and birthed entire trading strategies. And, often there is an actual rhyme and reason to them that can be profitable. It’s difficult for a cyclical stock to outperform in the downward trend of the cycle it's in, but that is exactly what highly rated POWR Ratings stocks should be doing.
Highly rated stocks have well managed companies behind the ratings, and a great example of this is Standex International Corp (SXI). Standex has been called a “mini-conglomerate” in the industrial space…think General Electric (GE) back when it was a great company (before it became a disaster, but has recently reemerged as a decent company again).
Standex operates in multiple industries across multiple geographies, and is large enough to compete with bigger companies, but small enough to be nimble in its go to market and consolidation activities. The company has products in markets ranging from aerospace and defense to automotive to food services.
It does business in Europe, Asia and the Americas, and it operates in multiple segments, from scientific instruments to electronics to engraving (no, not engraving your scotch glass…this engraving is for textured surfaces, like your car headlights, handheld electronics, and even packaging material which can be made stronger by engraving).
But the real magic at Standex is not in the number or types of markets it serves, but in management’s ability to build a successful mini-conglomerate. Integrating one company, let alone several, is not an easy task. Yet SXI seems to have found the formula to do it over and over again, all the while increasing profitability and margins.
After executing a series of 6 acquisitions over the past 8 years, the most recent of which was the acquisition of Minntronix (a maker of magnetic components for industrial, automation, and smart grid build) this year, the company has managed to increase operating margins over the last 9 quarters from 10.9% to 15.4%. A tall feet for any industrial company, but incredible for one digesting that many acquisitions.
In its most recent earnings release CEO David Dunbar gave credit to the markets SXI has deftly bought into. Dunbar said, “Sales from fast growth markets such as electric vehicles, renewable energy, smart grid, and the commercialization of space increased approximately 67% year on year to $24 million in fiscal fourth quarter 2023. We achieved record gross margin of 39.1%, up 280 bps year on year, and record consolidated adjusted operating margin of 15.4% in fiscal fourth quarter 2023.”
Standex trades at a PE of just over 12, and at 2.2 times sales. The stock is currently trading at close to a 25% discount to its latest analyst targets, which have been rising throughout 2023. Technically, the stock is in the low end of a range it entered in May of this year, trading from the mid-$130s up to just below $169.
Our POWR Ratings have Standex at an A overall, where it is outperforming over 98% of the stocks we track. It is especially strong in the Sentiment component (thus the rising analyst expectations) and has an almost 90% score in Quality.
Reenforcing just how strong the company has been in this challenging market and interest rate environment, Dunbar noted in the earnings release mentioned above, that the company had “...record gross margin, adjusted operating profit, adjusted operating margin, adjusted earnings per share, and free cash flow. This record fiscal performance was driven by our operating execution and strengthening of and enhanced focus on our fast growth end markets.”
That would be a great year in a booming market, but being able to achieve those numbers in the current environment puts the company in superb shape should interest rates actually ease a bit, and if it turns out the market is working through a bottoming process currently.
In any case, Standex has shown it can perform in a range of environments, and is making a name for itself as a high quality, excellently managed, industrial holding.
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SXI shares were trading at $144.09 per share on Tuesday afternoon, up $1.31 (+0.92%). Year-to-date, SXI has gained 41.57%, versus a 10.04% rise in the benchmark S&P 500 index during the same period.
About the Author: Steven Adams
After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.
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