2023-05-08 10:59:41 ET
Summary
- SPX Technologies, Inc. continues to pursue acquisitions and work on its transformation.
- The company is doing well, raising guidance along the way, even in a convincing manner here.
- I like the direction of travel, but see no need to chase shares after a 20% move higher.
About a month ago, I concluded that SPX Technologies, Inc. ( SPXC ) was in a full transformation and growth swing. This came as the company announced its latest acquisition, which actually triggered a 4% pullback. This looked like a small overreaction, in my view.
While liking the long-term ambitions of the company, I fail to see a great or compelling entry point just yet.
A Big Transformation
SPX Technologies was spun off from SPX Corp in 2015, at the time a $1.8 billion business. The company relied heavily on a billion dollar power generating business. This was completed by a higher margin detection & measurement segment which generated about a quarter of a billion in sales and a HVAC business which reported sales around half a billion dollars.
Shares traded around the $10 mark at the time, which looked compelling given that earnings power came down to around a dollar per share, but leverage was high and earnings were quite adjusted, all in a lower valuation environment as well of course.
Pre-pandemic, the company made some small iterations to the business which did not necessarily result in higher sales, but it did boost margins. In 2021, the company sold the Transformer Solutions, better known as the Power segment, at a non-impressive multiple as the company used proceeds for deleveraging and a number of tuck-in deals.
All these transitions made the company not necessarily bigger, but it did result in earnings advancing to nearly $3 per share. These improved earnings, improved positioning, and deleveraging pushed shares up to levels around the $60s in 2021.
Zooming to 2023
Shares of SPX peaked at $78 in February, and when I last covered the name in early April, they were down to $68 per share. The company had posted the 2022 results in February as full year sales rose 20% to $1.46 billion amidst the contribution of some acquisitions and strong organic growth, with operating earnings up 38% to $187 million. Net earnings were reported at $3.10 per share as net debt of $100 million looked quite modest.
The company guided for 2023 sales to come in between $1.50 and $1.54 billion, which at first glance does not look too impressive, yet earnings were seen up to a range between $3.30 and $3.55 per share. The 45 million shares granted the company an equity valuation of $3.0 billion, for an enterprise valuation of $3.1 billion, with shares trading around 20 times earnings.
In April, the company announced a $125 million deal for Canadian and privately held business TAMCO, a producer of motorized and non-motorized dampers which control airflow in specialty applications. The $50 million revenue contribution revealed that a small premium (versus its own valuation) has been paid at 2.5 times sales. Net debt would more than double to more than two hundred million, roughly equal to reported EBITDA. The $3 move lower to $68 wiped out $135 million in shareholder value, of course an overreaction as the upfront deal tag was less than the value lost in the move lower.
With the $3.50 per share earnings power translating into a 20 times earnings multiples, I continued to be willing to commit capital in the higher fifties, or perhaps the $60 mark, as this was a higher interest rate regime after all.
Coming Close
By early May, shares had fallen further to just $61, coming in very close to my targeted entry point, but just not there yet.
On the first of May, the company reached another deal. SPX will acquire ASPEQ in a relatively large deal valued at $418 million. ASPEQ is a leader in electrical heating solutions and will become part of the company’s HVAC platform. The company is set to add $120 million in sales, which reveals that a premium 3.5 times sales multiple has been paid, but it did mention that the deal should be accretive to margins of the HVAC segment.
That does not say that much anymore, as post the power divestment, the company only consists out of two segments of which HVAC carries the lower margins.
While the response in relation to the deal announcement has not been big, shares lost some value in the days after the announcement, as quite frankly the sales multiple being paid looks expensive.
The bigger news was the release of the first quarter earnings results later that week. The company posted a 30% increase in sales (as the comparables are not really fair) to $400 million, with revenues trending far beyond the guidance (if we annualized those numbers).
The company posted a strong first quarter earnings number of $0.94 per share, raising the guidance in a convincing way to $3.80-$3.95 per share, with the midpoint of the guidance being hiked nearly half a dollar, aided by the TAMCO deal as well of course. SPX specifically notes that the guidance excludes the ASPEQ deal.
The company posted a net debt load of $40 million by the end of the quarter, but this is ahead of both deal announcements. Hence, pro forma net debt should come in at $583 million.
Leverage will increase quite a bit, but given the strong guidance and the contribution of ASPEQ, I think that leverage should come in somewhere between 2–3 times, a bit higher, but still manageable.
And Now?
Following the big quarter and the convincing hike in the full year guidance, SPX Technologies, Inc. shares rose 20% in a single trading day to $74. Investors clearly like what they are seeing, alleviating some concerns on the ASPEQ deal.
The jump, albeit from lower levels, means that valuations have re-rated to 19 times earnings, but this is based on a very strong operating performance. Moreover, leverage should increase a bit, which should become evident and really pan out in the coming quarters. That said, the deal might have the potential to boost SPX Technologies, Inc. earnings per share beyond the $4 per share mark, which looks simply very impressive.
For me, there is no point trying to chase SPX Technologies, Inc. stock 20% higher, but the latest news is just exemplary of the improved performance of SPX here. Hence, I continue to be upbeat, but it will exercise patience to find a nice entry point, as the mid-sixties look quite appealing to me now.
For further details see:
SPX Technologies: Impressive Improved Performance