2023-04-05 15:29:53 ET
Summary
- SPX Technologies, Inc. has completed its next acquisition, this time a bit larger.
- The deal is really a bolt-on acquisition and feels a bit rich, even as a 4% pullback in response to the deal announcement feels like an overreaction.
- I like the long-term ambitions of the SPX Technologies' business here, yet see not a great compelling entry point just yet.
At the start of the year, I congratulated SPX Technologies, Inc. ( SPXC ) and its management on a very impressive transformation. The company has made a huge transformation in recent years, while it preserved earnings power, has become much better positioned, and leverage is very reasonable.
The only issue for (prospective) investors is that most of the transformation appeared to be priced in already, making the valuation largely fair in my eyes.
A Quick Recap
SPX Technologies, Inc. was a $1.8 billion business back in 2015, posting EBITDA margins just below 10%. This was the remaining business after SPX Flow was spun off from SPX Corp.
The company was largely comprised of a power generation business, which was responsible for about a billion in sales, with EBITDA margins reported in the mid-single-digit. The company furthermore operated a detection & measurement business which was highly profitable with margins posted around 20%, although sales only came in at a quarter of a billion. The remaining HVAC business generated over half a billion in sales, with EBITDA margins reported in the mid-teens.
Just a $10 stock in 2015 at the time of the break-up of the company, multiples were non-demanding as the company posted earnings of around a dollar per share. This looked very compelling, yet leverage was high and earnings were very adjusted, while market valuations at large were lower at the time.
Through 2019, ahead of the pandemic, the company kept sales stable at around $1.8 billion, but a shift in the activities of the business made that EBITDA margins had risen from 9% to 13%. This made that earnings rose to $2.75 per share (on an adjusted basis) pushing shares up to the $50 mark on the back of improved earnings power and a re-rating of the valuation multiple.
During the summer of 2021, the company sold its Transformer Solutions business, once known as the Power segment, in a deal valued at $645 million, albeit that net proceeds only came in at $540 million, at just 1.2 times sales. This made that pro forma sales fell to $1.2 billion with earnings down to $2.25 per share, with shares falling to $60 on the back of the deal announcement. With pro forma net cash seen around $3-4 per share and earnings power seen around $2.25 per share, I found that valuation at $60 quite demanding, despite an improved positioning.
The deal was set to accelerate the business in its transition, with 2025 sales seen at up to $2 billion and margins seen at 16%, as this could translate into earnings of $5-$6 per share at that point in time. Forwarding to January 2022 shares had risen to $67 as the company made some bolt-on acquisitions during 2022, including a smaller deal for ES, Cincinnati Fan, and International Tower Lighting.
These deals and organic growth meant that the company hiked the earnings guidance to $2.70-$2.85 per share, as most of the net cash position was depleted, as the company divested some legacy asbestos liabilities as well.
With net debt flattish, earnings approaching $3 per share, the resulting 23 times earnings multiple looked quite demanding, despite an improved positioning in my eyes. This made me consider shares at levels down in the fifties, levels still not seen.
What Now?
Since the start of the year, shares of SPX Technologies, Inc. have traded in a $65-$75 range, currently trading at $68 per share.
In the meantime, the company posted its 2022 results in mid-February. Full year sales rose 20% to $1.46 billion as adjusted operating earnings rose 38% to $187 million amidst the continued transformation of the business. A strong fourth quarter for the year made that adjusted earnings in the end rise to as much as $3.10 per share. Net debt came in at a midpoint of $100 million, a very reasonable amount, of course.
While revenue growth for 2023 is actually expected to be quite modest, with revenues set to come in within a $1.50-$1.54 billion range, SPX Technologies, Inc. sees meaningful earnings per share growth, with earnings seen between $3.30 and $3.55 per share.
With 45 million shares now trading at $68, the company commands an equity valuation just in excess of $3.0 billion, with the enterprise valuation coming in around $3.1 billion. This values the business at around 2 times sales and equity at around 20 times forward earnings.
Another Deal
At the start of April, SPX Technologies, Inc. announced its next deal, this time a deal slightly larger than a bolt-on acquisition. The company had reached a CAD 170 million deal ($125 million transaction) to acquire privately held TAMCO, a producer of motorized and non-motorized dampers which control airflow in large-scale specialty applications.
With a $50 million revenue contribution, the deal is a bit more pricey at 2.5 times sales, but the deal should be accretive to overall HVAC segment margins, although this has not been quantified. With pro forma net debt increasing to just over two hundred million, leverage is seen equal to EBITDA, still being very manageable. The deal will likely boost earnings by a couple of pennies, but nothing too meaningful.
The deal feels a bit expensive, as shares fell from $71 to $68 on the back of the announcement, which quite frankly cuts the value of SPX by about $135 million here. This arguably feels like an overreaction to a $125 million deal, of course.
That said, leverage will increase very modestly to 1 times EBITDA, and working with a $3.50 earnings per share number for the year, the valuation looks fair at around 20 times earnings. This comes as the company has done quite well, but rising interest rates have lifted demanded earnings yields across the board. While I am still attracted to SPX Technologies, Inc. shares, I am only willing to commit capital here in the higher fifties, perhaps the $60 mark.
For further details see:
SPX Technologies: In Full Transformation And Growth Swing