Graco Inc. (GGG), IDEX Corporation (IEX): This Niche Industrial Company Avoids the Big Boys to Its Advantage

IDEX Corporation (NYSE:IEX) operates in four business segments: fluid and metering technologies, health and science technologies, fire and safety and diversified products. The fluid and metering technologies division is IDEX Corporation (NYSE:IEX)’s biggest revenue driver, accounting for more than 40% of its top line. For the first quarter of fiscal 2013, IDEX Corporation (NYSE:IEX) grew quarterly earnings per share by 12% year-on-year, despite a modest 1% increase in revenue. This was the result of IDEX Corporation (NYSE:IEX)’s favorable cost structure benefiting from its restructuring activities in 2012. IDEX’s strong free cash flow also suggests potential catalysts in the form of accretive acquisitions or share buybacks.

Despite this, I am negative on IDEX Corporation (NYSE:IEX)’s analytical-instrument and fuel-transfer equipment segments, which are vulnerable to decreases in health spending and fuel prices.

Volatility and competition

Dresser-Rand Group Inc. (NYSE:DRC) is one of the world’s largest suppliers of custom-engineered rotating equipment solutions, such as centrifugal and reciprocating gas compressors, for its oil and gas clients. Although its quarterly revenue and earnings were up, total bookings fell by about 20% compared with a year ago. This should not be a major issues, as Dresser-Rand Group Inc. (NYSE:DRC)’s earnings tend to be back loaded with the fourth quarter contributing a significant proportion of full-year earnings.

But I still have two major concerns with Dresser-Rand Group Inc. (NYSE:DRC). One of them is that its sales of oil-field equipment are affected by the volatility of oil and gas prices. Another concern is that of keen competition from larger players like Siemens AG (ADR) (NYSE:SI) in its area of operations. This is in contrast with Graco, where large competitors are deterred from competing in its niche markets because they are too small.

Conclusion

Graco is on my watch list because of its gross-margin stability and success with past R&D investments. However, it does not look too attractive on valuations, given a forward P/E of 19.6 and a forward dividend yield of 1.5%. If the stock price corrects to give a yield above 2%, I will be much more interested in taking another look.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article This Niche Industrial Company Avoids the Big Boys to Its Advantage originally appeared on Fool.com is written by Mark Lin.

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