Morningstar | Initiating Coverage of Idex with Narrow Moat Rating and $140 FVE
We launch coverage of diversified industrial firm Idex with a narrow moat rating and a $140 fair value estimate. We also assign the company Standard stewardship, medium uncertainty, and stable moat trend ratings. Our fair value estimate implies a multiple of approximately 24 times our 2019 EPS estimate.We believe Idex has carved a narrow moat based primarily on customer switching costs and secondarily on intangible assets. Idex has a portfolio of moaty businesses that typically hold the number one or two market share across a variety of niche end markets. Its products often account for a small fraction of a customer’s costs but perform mission-critical functions in areas where the cost of failure is high, such as monitoring wastewater collection systems, fire suppression, and rescue tools. As any product failures could lead to costly business disruptions or even safety risks, customers are relatively less likely to switch to a cheaper but less proven alternative. Idex’s large installed base also drives a relatively stable stream of recurring revenue, which can constitute around 30%-40% of sales, depending on the business line. The company’s moat is supported by intangible assets, which include strong brand names (for example, the name Jaws of Life has become synonymous with emergency rescue tools in the United States), patent portfolio, and reputation for quality.
Idex’s narrow moat has allowed it to consistently deliver strong returns on invested capital, which have averaged around 16% over the last 10 years. We believe the firm’s moat sources are intact and think that Idex is more likely than not to continue outearning its cost of capital throughout the next decade. We view the stock as modestly overvalued at current levels, with shares trading in 2-star territory, and would prefer sitting on the sidelines and waiting for a more attractive entry point. That said, we think Idex is a solid business and deserves a spot on investors’ watchlists.
IDEX is an applied solutions business that sells pumps, valves, flow meters and other fluidics systems and components and engineered products. The company's segments are: Fluid and Metering Technologies, which designs, produces and distributes positive displacement pumps, flow meters, injectors and other fluid-handling pump modules and systems; Health and Science Technologies, which designs, produces and distributes fluidics, rotary lobe pumps, centrifugal and positive displacement pumps, roll compaction and drying systems; and Fire and Safety/Diversified Products, which designs, produces and distributes firefighting pumps, valves and controls, rescue tools, and lifting bags.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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