- SPX Technologies has continued and completed its transformation.
- The efforts were a huge success as the company has maintained 2020 earnings power while being much better positioned and leverage is modest.
- Investors have rightfully priced in better performance and positioning, leaving shares more than fully valued in my eyes.
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In the summer of 2021 I concluded that SPX Technologies (NYSE:SPXC), only thereafter renamed SPX Technologies, has seen its transformation nearing completion. This came as the company sold its engineered business, completing its transition, as the last move seemed a bit of a cheap sale, with some heavy earnings dilution incurred.
While the transition was completed and the 2025 targets were ambitious, upside would be seen if achieved, which would require very strong execution.
In 2015 SPX Corp. was a $1.8 billion business which posted EBITDA margins of around 9% after the company was spun-off into two businesses. The company was largely consisting out of power generation business, generating nearly a billion in sales yet posting EBITDA margins of just mid-single digit margins.
This was complemented by a detection & measurement business which generated merely a quarter of a billion in sales, yet margins of 20% made its profit contribution equal to the power business. All this was complemented by a HVAC business which generated over half a billion in sales, accompanied by EBITDA margins in their mid-teens, making it the most profitable segment out there.
Shares of SPX traded around $10 per share while pro forma earnings power came in around $1 per share, resulting in low multiples. Note that this was a different time (in terms of market valuations), that earnings were heavily adjusted and that leverage was quite high.
Forwarding to 2019, the business has actually seen shares fall a bit to $1.8 billion, but the composition of the business has improved with the power business (now called the engineered solutions segment) having shrunken while the other segments grew, which made that EBITDA improved to $200 million, coming in around 13% of sales, up from about 9% in 2015.
Higher margins, better positioning and lower leverage made that adjusted earnings rose to $2.76 per share as the company guided for earnings around $3 per share pre-Covid-19, pushing up shares to the $50 mark as investors re-rated the improved performance.
When I last picked up coverage in the summer of 2021 shares had recovered to the $60 mark as the company actually had seen a minimal improvement in the 2020 results despite the pandemic. For 2021, the company guided for sales around $1.6-$1.7 billion with earnings seen at a midpoint of $3.10 per share, while the company announced a few bolt-on deals around the time.
The big deal came in the summer of 2021 as the company sold its Transformer Solutions business (once power) in a deal valued at just $645 million with net proceeds coming in around $540 million, for just a 1.2 times effective sales multiple. On the back of the deal, the company cut the pro forma numbers, now seeing sales at just $1.25 billion, with earnings set to fall to $2.27 per share, down about ninety cents, implying that the divested activities were still quite profitable. Investors had some concerns as well, as shares fell from $64 to $60 upon the announcement.
Pro forma net cash would increase to $171 million, equal to $3-4 per share, as the remaining earnings power of $2.27 per share created a demanding valuation, despite becoming a pure play on detection & measurement and HVAC.
To offset the pain for investors, the company guided for 2025 sales to improve to $2.0 billion with margins seen at 16%. This should translate into earnings of $5-6 per share, which could unleash real potential, but required real execution as well.
Since the summer of 2021 shares had actually seen a major dip to the $40 mark in early 2022, amidst concerns about valuations, dollar strength and the economy. Ever since, shares have seen a strong recovery, having actually risen to a high of $75 in recent weeks now settling at $67, as truth be told is that shares have done quite alright.
Since the announcement of the sale, SPX has embarked on a few bolt-on deals. In August 2021, the company announced a bolt-on deal for ECS, a transaction adding $14 million in sales. In November, the company announced the purchase of Cincinnati Fan, an air movement company. While no details were announced, a 215 FTE count suggests a meaningful contribution. In spring of this year, an $18 million revenue contribution was acquired with the purchase of International Tower Lighting.
In the spring, the company posted 2021 sales of $1.22 billion, a touch light compared to the pro forma guidance with adjusted earnings seen at $2.33 per share. The company introduced a convincing $2.50-$2.80 per share guidance for 2022, still holding $142 million in net cash as of the end of 2021, despite some initial deals being announced. Following the ITL deal earlier this year the company hiked the adjusted earnings guidance to $2.55-$2.85 per share, despite a more challenging first quarter. The guidance was actually hiked to $2.70-$2.85 per share following the second quarter earnings report, although the business took on $49 million in net debt at the time, mostly related to the ITL deal.
The company has been working to further simplify the business. Early in November. The company reached a deal, which involved a $139 million cash contribution by SPX, to divest its asbestos liabilities in an effort to streamline the balance sheet but moreover provide a $0.08-$0.10 per share annual tailwind to earnings.
A little later the company hiked the full year sales guidance to $1.45 billion following the third quarter earnings report, now entirely comprised out of a $900 million HVAC segment which is set to post margins around 14%, and a half billion detection & measurement business which posts margins as high as 20%.
As a result, adjusted earnings per share are seen at a midpoint of $2.90 per share. Net debt of $63 million will increase to $200 million following the divestment of the asbestos liabilities, still translating into very reasonable leverage ratios.
Truth is that I am quite impressed with the transformation of SPX, more than I was back in 2021. The issue is that the market priced in quite a bit of this good news.
At $67, the company trades at 23 times adjusted earnings seen this year, perhaps reasonable given the great positioning, but a bit steep as well given the overall valuations and mantra of the market as the net cash position has been gone altogether now.
Hence, I want to congratulate management and investors for a great transformation, but see no reason to enter a position now, albeit that I will certainly consider shares if they dip to levels in the $50s.
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