Standex International Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Standex International Corporation is a diversified manufacturer with a focus on commercial and industrial products, primarily in the sectors of Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Standex International Corporation (SXI) is a diversified manufacturing company, specializing in products across five main segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions. Each segment caters to distinct markets, demonstrating SXI’s diversified approach to revenue generation.

  • Electronics: Manufactures and sells electronic components such as precision motion control devices. Key markets include automotive, aerospace, and industrial machinery. The demand for this segment depends on production growth in the end markets.
  • Engraving: Produces molds for industrial and consumer products, including embossing plates. The segment is driven by demand for packaging, promotional materials, and consumer goods.
  • Scientific: Develops and manufactures equipment for medical, analytical, research, and testing industries. The segment is generally seen as more predictable because it is more tied to the non-cyclical healthcare industry, including medical devices, pharmaceuticals and life sciences.
  • Engineering Technologies: Creates custom engineered solutions with specific process technology, including heat treatment, forming, or machining. Key markets here are related to automotive, aerospace, and defense.
  • Specialty Solutions: Provides solutions and products in a range of markets and subsegments such as food service, hydraulics and other industrial. This segment is comprised of many small acquisitions.

Moat Analysis: 3/5 SXI has a moderate moat, arising primarily from certain aspects of its diversified business and some specialized market niches. This moat isn’t broad nor particularly deep, however, some things help to protect it.

  • Intangible Assets/Proprietary Technology: SXI’s expertise in custom engineering solutions in Engineering Technologies and high-quality engraving provide some level of product differentiation, and its ability to deliver highly specialized products like medical and scientific equipment means that they have some stickiness with their clients.
  • Economies of Scale: Some of the company’s operations like its electronics production have an economy of scale due to their large production volumes. Additionally, the company is very well integrated into its clients’ workflows, which increases the customer retention.
  • Switching Costs: In some niches such as engineering technologies and scientific, high switching costs exist that increase client stickiness to one company’s products. The company’s products are highly specialized to each client and often requires retooling and training to make sure they work correctly. However, that switch may not be impossible if there was a suitable alternative.

  • Barriers to Entry: Because some of their businesses involve high levels of technical expertise and regulatory approvals, they do create barriers for new entrants.

  • Justification: While SXI has a certain amount of competitive advantage, it isn’t as strong as to garner a higher rating. The company’s advantages provide some level of stability, but don’t make their business indestructible. SXI has a diversified revenue stream, making it less sensitive to disruption in any specific industry. The company’s niche business areas make it less likely that competitors will enter in the first place. However, these competitive advantages are not as strong as those of companies with large brands, network effects, or low costs and are often localized to specific geographies or industries. Competitors do not need large capital expenditures or high R&D expenses to compete with SXI.

Risks to the Moat and Business Resilience:

SXI’s moat is at risk from various factors:

  • Commoditization: Some product segments face intense price competition if product offerings are not sufficiently differentiated.
  • Technological Disruption: The engineering, electronic and scientific segments might get disrupted by new or emerging technologies, leading to lower demand for their current products. * Increased Competition: Other competitors are aggressively pursuing more market share and trying to build their brand through marketing and sales initiatives.
  • Economic Cycle: Some of SXI’s segments, especially engineering technologies, are susceptible to cyclical patterns, increasing market risk. A slowdown in global industrial and automotive production could negatively affect the engineering business.
  • Customer Concentration: Although the company sells products to a large number of clients, some segments depend more heavily on particular large customers which increases concentration risks. * FX Volatility: International sales expose the company to exchange rate volatility, which can significantly affect revenue. * Acquisitions: SXI has made several acquisitions. If it is not able to effectively manage them, their performance could decline over time. * Supply Chain Disruption: The company faces supply chain risks. For instance, the microchip shortage in 2021 led to increased prices and delays.

Despite those risks, the business has some resilience:

  • Diversification: The company has a diverse set of business segments and clients that reduce dependency on one sector of the economy.
  • Experienced Leadership: The management team has a lot of experience in their core business, and have consistently generated good long-term returns.
  • Geographic Diversification: The business operates in different geographies, reducing its dependence on one country.

Detailed Explanation of the Business and Financials:

  • Revenue Distribution: SXI’s revenue stream is diverse, stemming from multiple segments, including electronics (30% of revenue in 2023), engraving, scientific, engineering technology, and specialty solutions. The company’s geographic mix shows that most of its revenue is generated in North America (49%), followed by Europe (37%), Asia (10%), and other regions (4%). This diversification helps to reduce dependence on specific markets or industries. However, these figures do not add up to 100%, because of inter-segment sales eliminations.

  • Industry Trends: There are many trends that are currently affecting the company: Growth in robotics, automation, and the electrification of cars. These growth avenues in the company’s served markets are increasing demand for electronic components. Additionally, as the global beer market consolidates, there are larger demands for customized high-quality molds from their engraving businesses. Finally, the company’s focus on high-technology offerings and investments in research and development should help keep them ahead of the market.

  • Margins and Profitability: The company’s gross margin is 33.4% and EBITDA margin is 14.4% on adjusted numbers for the fiscal year ended June 30, 2023. The company has good profitability, but margins are still highly impacted by external factors, such as material and energy prices. However, the company has been able to pass some cost increases on to customers.

  • Competitive Landscape: SXI competes in fragmented markets. In these markets, competitors range from niche operators to large multinational companies. However, competition in many segments is highly influenced by price. SXI emphasizes performance and quality over price, leading to a premium over competitors, which requires continuous innovation.

  • What Makes the Company Different: SXI’s unique combination of offerings and a focus on custom engineering solutions sets it apart. Their ability to integrate their products in an existing workflow allows them to produce a product for clients that cannot easily be replicated. SXI has also focused on building strong long-term relationships with their clients.

Financials:

  • Revenue: SXI’s annual net sales for fiscal year 2023 were $610.6 million, a 7.7% increase over the previous year. On a 3-year average basis (2020-2023) the growth rate in sales was at 5.5% annual. The main increase in sales has been from a 16% increase in sales in the Electronics segment and 7% increase in the Engraving segment. The other segments saw flat growth.
  • Profitability: Operating profit for fiscal year 2023 was $74.4 million, a 22% increase compared to 2022. Net income attributable to the parent was $52.5 million in 2023, a 33% increase over 2022. SXI has had improved profitability due to better operating efficiency, pricing, and volume increases.
  • Cash Flow: The company’s cash flow from operations for fiscal year 2023 was $91.7 million, with $46 million in capital expenditures. The free cash flow has been steadily increasing over time.
  • Balance Sheet Health: SXI’s balance sheet shows a healthy financial state. The company had a debt to equity ratio of 1.00 in 2023, indicating moderate leverage. Net Debt was $129 million in 2023. The company’s current ratio was 2.4, indicating a sufficient ability to pay for current obligations. The current ratio has also increased over time, while their debt has not drastically increased.

Recent Concerns and Management Response:

  • Weakening Demand: The company’s guidance for fiscal year 2024 has been revised down due to recent weakness in demand, mainly in the electronics sector, which has impacted their earnings outlook for the coming year. However, the company still believes in the long term prospects.
  • Supply Chain issues: Some material price increases and supply chain issues have caused some issues for production. However, the company is working towards more stable supply chains and better prices for raw materials.
  • Acquisition integration: The management team has acknowledged that integrating acquired businesses has taken longer than intended. However, they also believe that these acquisitions are vital to expanding into new markets and business lines.

Understandability: 3/5

SXI’s business is moderately complex, earning a 3 out of 5 for understandability. Here’s why:

  • Moderate Complexity: While each individual segment is relatively straightforward to understand, how all the segments work together requires more analysis and thinking. The level of specialized knowledge required in some segments further increases complexity.
  • Diverse Operations: The diverse range of products and customer applications can be difficult for an investor to keep track of, especially because the competitive landscape changes in every industry. Understanding all of these things takes more work and knowledge than is typical for most investors.
  • Integration with client workflows: For some segments, the company is very well integrated with their client’s workflows, which makes it more difficult to know the business well.

Balance Sheet Health: 4/5

SXI’s balance sheet is healthy, earning a 4 out of 5 for balance sheet health:

  • Moderate Leverage: The company has maintained a debt-to-equity ratio of 1.00 in 2023, which while not zero, is not unacceptably high.
  • Strong Liquidity: A strong current ratio of 2.4 gives the company ample liquidity to deal with any unforeseen circumstances or challenges that might arise, like the recent downturn in demand.
  • Positive Cashflow: The business generates positive operating cash flow and free cashflow, which increases its financial flexibility to manage its debt and invest in growth.
  • Conservative Acquisitions: The company makes regular strategic acquisitions but manages to maintain financial flexibility even after integrating them into their operations.

Conclusion:

SXI is a well-managed, diversified company, with stable profitability and strong financial backing. However, competition and technological disruption present a constant threat that needs to be evaluated by the management. The business is somewhat complex because of its diversified revenue streams and different business lines, and their dependence on niche markets.

Disclaimer: This report is for informational purposes only and should not be taken as financial advice. Always consult a qualified financial advisor for any investment decisions.