Helios Technologies: A High-Conviction Buy for Capital Preservation and Income in a Slowing Industrial Cycle

In a macroeconomic environment marked by industrial slowdowns and margin pressures, Helios Technologies (HELIO) stands out as a compelling opportunity for investors seeking both capital preservation and income generation. The company's Q3 2025 guidance, coupled with its operational turnaround and strategic divestitures, paints a picture of resilience and disciplined execution that aligns perfectly with the priorities of risk-conscious investors.

Margin Expansion: A Foundation for Sustainable Earnings

Helios' Q3 2025 guidance underscores a strategic focus on margin expansion, with adjusted EBITDA margins projected to range between 19.5% and 20.5%. This represents a sequential improvement from Q2 2025's 18.6% and reflects the company's ability to navigate headwinds such as tariffs and input cost inflation. The Hydraulics segment, a core driver of growth, achieved a 120-basis-point gross margin expansion in Q2 despite a 3% sales decline, demonstrating the power of cost discipline and operational leverage.

The company's restructuring initiatives, including the reorganization of its Helios Center for Engineering Excellence and leadership changes, have accelerated cost optimization. For instance, Selling, Engineering, and Administrative (SEA) expenses grew by just 2% year-over-year in Q2, outpacing revenue growth and highlighting efficient resource allocation. These efforts have not only stabilized margins but also improved cash flow generation, with $37 million in operating cash flow in Q2—the second-highest in company history.

Order Backlog Growth: A Leading Indicator of Future Revenue

Helios' seven consecutive months of order book growth is a critical tailwind for its 2025 outlook. The company has reported the strongest order backlog since 2021, driven by stabilization in key markets such as agriculture, European construction, and health and wellness. This momentum is further supported by a restocking cycle in distributor inventories, which have declined to levels suggesting pent-up demand.

The Q3 2025 revenue guidance of $208–215 million (9% year-over-year growth at the midpoint) is underpinned by this backlog. Notably, the company's visibility into the third quarter is unusually strong, with management citing “favorable sequential trends” in customer demand. This visibility is rare in a slowing industrial cycle and provides a buffer against macroeconomic volatility.

Strategic Divestitures: Refocusing for Long-Term Value

The divestiture of the Custom Fluidpower (CFP) business for $83 million AUD is a textbook example of capital-efficient restructuring. By exiting non-core segments, Helios is reallocating resources to its high-margin Hydraulics and Electronics businesses, which are better positioned to capitalize on long-term trends in automation and industrial innovation.

The CFP sale, expected to close within 60–90 days, will further reduce Helios' net debt-to-EBITDA leverage ratio to 2.6x, a 13% improvement year-over-year. This deleveraging enhances financial flexibility and supports the company's ability to sustain its 28-year dividend streak while funding strategic initiatives. Additionally, the proceeds will be used for share repurchases, which have already seen 200,000 shares retired at an average price of $32.29 in Q2.

Why This Is a High-Conviction Buy

For capital preservation and income-focused investors, Helios offers a rare combination of defensive characteristics and growth potential:
1. Margin Resilience: The company's cost discipline and operational restructuring have insulated it from macroeconomic shocks, ensuring stable cash flows.
2. Dividend Safety: With a payout ratio of just 30% and a strong balance sheet, Helios' $0.22 quarterly dividend is well-supported.
3. Capital Efficiency: The CFP divestiture and share buybacks enhance shareholder value, while the order backlog provides a clear path to revenue growth.

Conclusion: A Strategic Play in a Volatile Market

Helios Technologies is a rare industrial stock that balances defensive qualities with proactive growth strategies. Its Q3 2025 guidance, bolstered by margin expansion, order backlog strength, and strategic divestitures, positions it as a high-conviction buy for investors prioritizing capital preservation and income. In a slowing industrial cycle, Helios' disciplined execution and focus on core competencies make it a standout candidate for long-term portfolio inclusion.

For those seeking both downside protection and upside potential, Helios Technologies offers a compelling case to act now.