2023-07-10 12:47:12 ET
Summary
- The latest earnings released in May by SPX came in as one of the best among industrial stocks, with higher volumes and price increases contributing to the organic growth.
- The company has raised guidance and now forecasts revenue growth of 11%, and sees EPS growth of 25%. This positive view is underscored by a growing backlog.
- As valuation remains at reasonable levels, SPX should be viewed as an attractive stock to get exposure to growing markets, such as HVAC and secular trends, like decarbonization.
This year has been generally positive for the stock market so far, with some stocks like SPX Technologies ( SPXC ) handily outperforming the broader market. SPX's strong returns have been mostly driven by the strong quarterly results posted in May, as the company beat expectations and raised the guidance for 2023.
While the demand across end markets seems supportive for growth in 2023, the impact of a potential modest macro-economic slowdown should be limited to SPX, as most of its revenue stems from relatively stable businesses, such as replacements, or longer-cycle segments, like infrastructure.
As valuation seems to remain at reasonable levels, I believe SPX Technologies should be viewed as an attractive stock to get exposure to growing markets, such as HVAC and secular trends, such as decarbonization.
Strong Quarterly Earnings
The latest earnings released in May by SPX came in as one of the best among industrial stocks. Top line growth was robust, as revenue increased nearly 30% in Q1 2023 from a year ago, driven by organic growth in both segments, HVAC and Detection & Measurement, while only 0.7% was due to the acquisition of ITL in 2022.
Higher volumes and price increases contributed to the organic growth. Backlog remained at high levels and throughput was strong, led by improved operational execution, including supply chain and labor conditions.
This positive combination is reflected on to the bottom line as well, particularly in HVAC segment, as segment income margin increased from 10.7% in Q1 2022 to 19.0% in Q1 2023. For the whole company, income margin came in at 18.6%, also a large increase, compared to 12.9% in Q1 2022.
Just to give some perspective, SPX has seen generally positive revenue growth, while margins and SGA (selling, general and administrative expenses) have been nearly flat since 2020. While M&A activity certainly plays a role here, margin improvement in the last quarter was a welcome development for the company.
SPX reported data, consolidated by the author
Positive Outlook
For full-year 2023, the company has raised the guidance and now forecasts revenue growth of 11% in the mid of the range and sees income margin in the range of 18.5% to 19.5%, with EPS growth of 25%. This positive view from the management team is underscored by a growing backlog and the demand coming from end markets, such as demand for HVAC cooling in data centers, battery storage and semiconductors, and new projects for Detection & Measurement segments.
Recent acquisitions are also expected to contribute to the company's growth path. The acquisition of TAMCO will expand SPX's offerings to attend to the cooling market and the acquisition of ASPEQ will complement the electric heating business, more than doubling its current revenue there. While relatively small in size, as both acquisitions combined account for a revenue of roughly $170 million, compared to SPX's TTM revenue of $1.55 billion, TAMCO and ASPEQ will increase the company’s exposure to growing markets, such as electric heating, driven by megatrends like decarbonization.
While SPX has added the equivalent of nearly $500 million of revenue just through acquisitions over the past 4 years, the company’s strategy for the coming years is relatively less reliant on inorganic growth to achieve top line growth objectives.
That means the bulk of growth in the next years should stem from existing operations. However, it is fair to say that, at least in the short term, current demand trends seem constructive for SPX. Looking ahead though, the situation is less certain and of course it will depend on the macro-economic conditions as well.
My view, however, is that even though SPX faces some challenges to deliver the expected growth, the impact may be limited for the company, as roughly 2/3 of SPX's revenue comes from replacement and, on top of that, its end markets are partially composed of government and utilities, which are less susceptible to demand fluctuations.
Longer term, as macro-economic conditions improve, SPX’s large exposure to the U.S market will be a positive for the company in my view, as the U.S. economy is expected to recover faster than European nations and infrastructure projects should remain in the spotlight by the U.S. government.
Fair Valuation Despite Stock Rally
After the recent selloff on July 5 th , following a downgrade by a Wall Street analysts, shares of SPX are still outperforming industrial stocks and the broader market this year. As illustrated below, SPX is up 19.5%, while XLI, the most traded ETF focused on industrial companies, gained just 7.9%, and S&P 500 increased 15.0%.
Trading at a Forward P/E of 19.9, SPX valuation is now nearly 8% below the industrial machinery peer group average of 21.6 and 25% below S&P 500 multiple of 24.9, which suggests some upside potential for SPX on a relative basis.
From a historical perspective, we have here a case of multiple expansion in place, as SPX's P/E 5-Year average of 18.3 is quite lower now compared to current levels. My view is that it is largely justified, as we have seen the company surpassing earnings expectations in the overwhelming majority of quarters over the past 4 years.
That said, assuming the guidance for 2023 as the base case scenario, and absent no meaningful deceleration in the company's end markets take place in the foreseeable future, it seems that current valuation levels are appropriate and any multiple contraction should prove temporary.
In conclusion, I see the recent selloff as completely normal after a strong rally over the last 2 months, and while prices can take some time to recover, the next earnings report may become a new catalyst to move shares higher again in my opinion.
For further details see:
SPX Technologies: Healthy Outlook, Reasonable Valuation