SPX Technologies: Transformation Delivers High Returns And Promises More Growth

seekingalpha05-15

SPX Technologies has experienced significant share price growth of 91.86% in the past year.The company has undergone a transformation, divesting numerous businesses and acquiring others, leading to a ...

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J. Michael Jones/iStock Editorial via Getty Images Investment Thesis for SPX  Growth stock SPX Technologies (NYSE:SPXC) has just had a year of blistering share price growth, 91.86%. And the odds favor more of these years, although not necessarily at the same pace. Over the past decade, it has gone through a transformation, one in which is divested numerous business and acquired others. SPX has been able to increase the value of its equity 10-fold in as many years, thanks to the transformation and other initiatives. I have rated the stock a Strong Buy, anticipating a 34.27% increase in price over the next 12 months. SPX Technologies: A global supplier of infrastructure equipment The company specializes in HVAC (heating, ventilation, and air conditioning) as well as detection and measurement products. [March 26, 2024 Investor Day Presentation]   SPXC Where SPX Products are Used (March 26, 2024 Investor Presentation) The HVAC segment includes cooling towers, electric heating, engineered air movement, and hydronics. The Detection & Measurement [D&M] segment comprises location and inspection services, aids to navigation, communication technologies, and fare collection. Over the past decade, the company has transformed itself through a series of divestitures and acquisitions.   SPXC Transformation slide (SPXC Investor Day Presentation) It now feels that it is positioned towards the high-end of the value chain. The company’s Q1-2024 results were released on May 2, and showed strength up and down the income statement:  Revenue jumped from $400 million in the same quarter last year to $465 million this year. Adjusted EBITDA also grew substantially, to $92 million from $62.7 million. Net income rose to $49 million from $42.8 million in Q1-2023.  At the close on May 14, the stock price was $140.40 and it had a market cap of $6.43 billion. Competition and competitive advantages In its 10-K for 2023, SPX said its competitive position could not be accurately fixed because it and its competitors offer different product lines and serve different markets. Competition revolves around service, product performance, technical innovation, and price. The company said it competes effectively on each of these factors. It’s notable that price comes last on the list, and we should anticipate relatively good margins. Generally, its margins are better than the Industrials sector medians. Two out of three returns are slightly better than the sector medians (all TTM):  Return on common equity: 13.10% which is 5.09% above the median of 12.46%. Return on total capital: 8.81% versus 7.17%, a 22.88% difference. Return on total assets: 3.43%, which is 28.99% below the sector’s 4.83%.  SPX profit margins Two of its three profit margins outperform the sector median, on a TTM basis:  Gross profit margin: 39.22%, versus 30.85% for the sector median. EBITDA margin: 17.84% compared to 13.72% for the sector. Net income margin: 5.32%, which is 10.26% less than the sector’s 5.93%.  SPX reported “significant” margin expansion in both segments in Q1-2024. That included 360 basis points in HVAC due mainly to higher prices (and presumably better margins) and a more favorable product mix than in the same quarter last year. For D&M, it was a gain of 130 points because of higher revenue and more operating leverage. In its guidance for full-year 2024, the company expects more margin gains from HVAC while D&M is expected to remain the same. On a consolidated basis, it expects a 2024 gross margin of 21.60% - 22.60%, up from 21.00% - 22.00% in 2023. One reason for the growth may its continuous improvement initiative, which should help reduce costs and wastes. Another will be its shift toward businesses with higher profitability. SPX revenue and earnings growth Over the past three years, and if management delivers on its 2024 guidance, the company will have delivered impressive growth performances:   SPXC Ebitda & EPS chart (SPXC Investor Day Presentation) Wall Street analysts see the company generating strong earnings growth this year and next year, before levelling out in 2025:   SPXC Analyst EPS Estimates (SeekingAlpha ) Analysts are forecasting revenue growth of 14.12% this year and 5.71% next year. For this year at least, President and CEO Gene Lowe is bullish. In the first quarter earnings report he said, “I’m very pleased with our strong Q1 performance, which included substantial growth in all of our key profit measures and significant margin expansion in both segments.” He added, “Looking ahead, we continue to see overall favorable demand trends and positive operational momentum.” On the Q1 earnings call, he told analysts,  “Last month at our Investor Day, we shared a new framework for the continuation of our value creation journey. We intend to further build on our strong foundation of niche engineered and tech-enabled products, strong positions, moats and sustainable solutions. “We’ll also continue to leverage our business system to drive value through growth investments and initiatives, as well as through strategic M&A. Our new framework targets average EBITDA growth of 15% plus annually at margins of more than 20%.”  The company should have the free cash flow it needs to invest in organic or acquired growth: Data by YCharts It does not pay a dividend and did not repurchase any of its shares in 2023, although it has an existing authorization of $100 million. If it does not buy any back this year, all of its cash flow will be available for growth. Management and SPX’s business strategy President and CEO Gene Lowe joined SPX in 2008 and took on his current roles in 2015. Before joining the company, he worked at Milliken & Company, Bain & Company, and Lazard Technology Partners. Vice President, CFO, and Treasurer Mark Carano moved into these positions in 2023, after serving in similar roles at Insteel Industries, Inc. (IIIN), privately-held Big River Steel, and Babcock & Wilcox Enterprises, Inc. (BW). Previously, he had been an investment banker for 14 years. SPX articulates its strategy on its website, Our Company - SPX Technologies in Charlotte, NC “Our business strategy is focused on driving growth in our HVAC and detection and measurement businesses through new product innovation; geographic and channel expansion; entry into adjacent markets and targeted strategic initiatives. In addition to leveraging our scalable growth platform in HVAC and detection and measurement, we employ our leading engineering and manufacturing expertise to decrease costs and increase efficiency. This ensures that we are well-positioned to benefit from future global infrastructure investment.” The strategy has been a success, according to the Investor Day presentation:   SPXC Market Cap Growth chart (Investor Day Presentation) That represents a CAGR of 26.88% per year, which is a real winner for long-term investors. Here’s another perspective on the success of its strategy:   SPXC Comparative Performance chart (SPXC 10-K for 2023) The chart shows growth of an initial investment of $100 on December 31, 2018. SPX Valuations Given that kind of rapid growth, it follows that the valuation ratios would be high, except for the PEG TTM which adds a growth factor to the P/E:   SPXC Valuations table (SeekingAlpha ) This is an excerpt from the SPX Valuations page. In this year’s Q1 earnings report, SPX offered full-year adjusted EPS range of $5.15 to $5.40. That’s an increase from the Q4-2023 guidance of $4.85 to $5.15; management added that the midpoint implies year-over-year growth of about 23%. Analysts make it 23.87%. Adding 23.87% to the January 2, 2024 opening price of $99.96 would take the price to $123.82. But, over the first four and half months of this year, the price has already blown past it to $140.40. Indeed, the price rose by 7.37% on May 3 (the day after Q1 earnings were released) from $121.95 to $130.94. It jumped another 2.54% on the following business day, and 3.91% on May 9. Over the past four and a half months, the share price gained 40.45%. Investors and analysts alike have strong expectations. Over the past three months, four analysts have revised their estimates upward and none have revised downward. An intrinsic valuation shows why high expectations might be justified:   SPXC Intrinsic Value calculator (OmniCalculator.com) Sources: Earnings per share is the sum of the past four quarterly results. Although the CAGR of the share price has been 26.88%, I’ve opted to be more conservative and estimate a 20.00% growth rate. The Moody's Seasoned Aaa Corporate Bond Yield at the close on May 14 was 5.23%. An increase from $140.40 on May 14 to $188.51 represents an increase of 34.27%. That is a reasonable one-year price target. As we’ve seen, SPX is seeing strong demand, is enjoying higher margins, and is positioned for more acquisitions. What’s more, the Quant system gives SPX a rare Strong Buy rating, as do four of the five Wall Street analysts (the fifth rates it a Hold). I rate it a Strong Buy, while no other Seeking Alpha analysts have rated it in the past 90 days. Risks for SPX shareholders SPX has been an aggressive acquisitor and will likely stay on that path. That opens a number of risk exposures, including difficulty in integration, potentially higher expenses, diversion of management attention and more. Many of its markets are cyclical or swayed by broader economic events. In addition, the timing on major projects could lead to fluctuations from period to period. And as its biggest segment is focused on heating and cooling products, it is susceptible to seasonal and weather-related variations. As a company that operates globally, it faces exposure to geopolitical events and currency exchange rates. It can mitigate these risks to some extent with its hedging operations, but even hedging can bring an element of uncertainty. SPX derives some of its revenue through fixed-price contracts, meaning it could suffer losses if it bids too low or inflation becomes an issue again. In the 10-K, the company noted that development of intellectual property rights is critical to its ongoing success. As it also noted, if it does not accurately predict, prepare, and respond to technology innovations and other factors, its long-term competitiveness could be affected. Conclusion Investors looking for strong growth stocks might find what they’re seeking in SPX Technologies. Its decision a decade ago to shake up its product mix has delivered outstanding returns and positions it for more growth in coming years. Given its ongoing initiatives, strategy, and available resources, it is reasonable to assume that it will continue to outperform over the next five to ten years. However, investors should watch its growth rate and margins, for signs that its profitable growth is slowing.  I have rated the share price a Strong Buy for the coming year, with an expectation of just over a 34% gain.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2435659438"}