IDEX Corp

Idex's second-quarter adjusted EPS of $2.32 beat the FactSet consensus estimate by $0.21. Organic sales increased by 5% and adjusted EPS increased by 12% from the prior-year period.

Why it matters: Management raised its guidance and now anticipates full-year organic sales growth of 5%-6% (up from 3%-4% previously) and adjusted EPS of $8.70-$8.85 (up from $8.35-$8.55 previously). Organic orders grew 28% year over year, with double-digit growth across all three segments. Health and science technologies organic orders were up a stellar 47%, fueled by accelerating demand in the data center, semiconductor, and space and defense end markets. The strong growth in orders gives us confidence that Idex can reach its 2026 targets, but also makes us optimistic that the company can maintain its strong momentum heading into 2027, as we believe Idex is well-positioned to benefit from growth driven by investments in artificial intelligence.

The bottom line: We've raised our fair value estimate for wide-moat-rated Idex to $226 per share from $220, which reflects our more optimistic near-term revenue growth projections and time value of money. We see the shares as fairly valued currently. Organic sales growth in the second quarter was mostly driven by 12% organic growth in health and science technologies, which benefited from AI-related investments in data centers as well as related industries supporting the data center buildout.

Key stats: Idex now has roughly 20% revenue exposure to end markets that are seeing an acceleration in growth: data center, semiconductor, water, and space and defense.

BLANK PAGE

We've raised our fair value estimate for Idex to $226 per share from $220 after the company reported second-quarter results, which reflects our more optimistic near-term revenue growth projections and time value of money. Management raised its guidance and now anticipates full-year organic sales growth of 5%-6% (up from 3%-4% previously) and adjusted EPS of $8.70-$8.85 (up from $8.35-$8.55 previously).

We model a roughly 6% organic revenue CAGR during our five-year explicit forecast period. In the long run, we view Idex as a GDP-plus business, projecting organic revenue growth that outpaces the industrial production growth rate by approximately 1%-2%. This is driven by ongoing investments in R&D, which fuel revenue growth through new product introductions, entry into adjacent markets, and market share gains. Additionally, we expect that management will continue to invest in M&A, and our model incorporates meaningful acquisitions, helping the company reach a roughly 9% total growth rate from 2025 through 2030. In our base-case scenario, we model an average enterprise value/sales multiple of 2.5 times for acquisitions.

We project adjusted EBITDA margins averaging around 28% over the next five years, roughly 50 basis points above the average adjusted EBITDA margins during the prior five years, as we expect the company to benefit from higher volumes driving increased profitability in the long run. We model a roughly 29% adjusted EBITDA margin for our midcycle assumption. We assume an 8.6% weighted average cost of capital and a 22% long-run effective tax rate in our model.

We believe that Idex has dug a wide moat based on customer switching costs and intangible assets. Idex differentiates itself by producing highly engineered products (including pumps, valves, flow meters, and fluidic systems) for a variety of niche markets, where it typically holds the number-one or -two market share position. The company’s Lean manufacturing capabilities and flexible operations allow it to thrive in a high-mix and low-volume environment, offering customers a wide array of configurable and customizable solutions.

Idex has a large installed base that is protected by customer switching costs. Equipment manufactured by Idex often performs mission-critical functions in areas where the cost of failure is high. For example, ADS and iPek solutions are used for monitoring wastewater collection systems, Band-It fastening solutions are used on submarines and space shuttles (and have even been used on the International Space Station and Mars rover), and Hurst Jaws of Life are used to rescue people from car accidents. As such, any product failures could lead to costly business disruptions, environmental hazards, safety risks, or even loss of life. Idex’s long-standing reputation for quality and record of safety allow it to retain customer loyalty in these specialized and difficult applications where the margin for error is low. Furthermore, considering that Idex’s equipment often accounts for a fraction of a customer’s bill of materials but performs a vital function, we believe that customers are loath to switch to cheaper but less-proven alternatives, as the potential cost of failure (including unscheduled downtime and safety considerations) could far outweigh potential cost savings.

Idex’s large installed base drives a healthy stream of recurring revenue, which we estimate can constitute around 30%-40% of sales, depending on the business line. The constant wear and tear on the equipment results in steady demand for servicing and replacement parts, and aftermarket revenue tends to be relatively more stable and carry higher margins. In some areas of its business, Idex also benefits from long-term customer agreements. For example, the health and science technologies segment has multiyear contracts to supply components to original equipment manufacturers, and many businesses in Idex’s portfolio generate a part of their revenue through service agreements. Additionally, some of Idex’s businesses operate under a razor-and-blade model, where the installed base drives a steady stream of revenue from consumables (for instance, the health and science segment supplies microfluidic cartridges).

While new entrants have made attempts to capture aftermarket sales in more generic and commoditized industrials markets, we believe that Idex is relatively less vulnerable to the threat of new entrants given that it tends to operate in more niche markets. Its highly engineered and customizable parts are often difficult to replicate. Additionally, the high-mix and low-volume nature of its business creates a barrier to entry, as it would require competitors to match the breadth of Idex’s portfolio, as well as to replicate its network of relationships with customers and distributors, in order to establish the requisite scale to compete effectively. Idex has not ceded share in the aftermarket space, and we believe that its customer switching costs moat source remains intact.

Idex’s wide moat is also supported by intangible assets, including strong brands (for example, the name Jaws of Life has become synonymous with emergency rescue tools in the United States), patent portfolio, and reputation for quality and reliability. We believe the company maintains an adequate level of R&D spending, averaging approximately 3% of sales in recent years, roughly 1% more than its peers. Idex’s investments in innovation have allowed it to capture incremental market share gains through introductions of new and improved products, as well as entry into adjacent markets. For example, in 2012 the company launched the X-Smart automatic dispenser, a small-size and economical paint dispenser, that has helped Idex win market share, particularly in emerging economies. The firm has also expanded its offerings of hydraulic rescue tools with new battery-powered tools that are portable, such as eDraulic and StrongArm, which have helped Idex expand its market share and keep abreast of competition. A more recent example of Idex’s innovation is the 2019 introduction of the SAM Control System, an integrated system that manages a firetruck’s water flow and simplifies the job of the pump operator, thus minimizing the potential for error. Overall, we think Idex has done a respectable job refreshing its product portfolio to maintain its competitive position and keep rivals at bay.

Idex has a portfolio of moaty businesses that have leading share in niche end markets.

Idex generates strong free cash flows, which have averaged around 17.5% of sales during the past 10 years.

The acquisitions of Akron Brass and AWG, as well as new product introductions (including eDraulic and SAM), have reinforced Idex’s already strong competitive position in the fire and safety business.

If industrial production remains sluggish, organic revenue growth may decelerate.

Idex relies on acquisitions to supplement its organic growth, and poor execution of its M&A strategy could destroy shareholder value.

Cost inflation, tariffs, and persistent strength in the US dollar could have an adverse impact on the firm’s profitability.