SPX Corp: An Industrial Stock Worth Betting On

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Industrials is one of the first sectors to go up when the economy improves. Point in fact, Morningstar reports that industrials have risen by about 13% since the first of the year after the US GDP jumped almost 3% in the fourth quarter. The trend makes sense – economic growth requires raw materials, construction, the transportation of those materials and the planning to put them all in place. In other words, there is room for growth across the board in this sector right now but that doesn’t mean that all companies will experience the same boon. Some will fare better than others.

One industrials company that I think is poised to pop is SPX Corporation (NYSE: SPW).

SPX Corporation includes brand names Actron, Anhydro, APV, Balcke-Durr, Blue M, Bran + Luebbe, Copes-Vulcan, Dielectric, Dollinger, Fenn, Flash Technology, GD Engineering, Genfare, GLE, Hankison, Jemaco, Johnson Pump, Kayex, Lightnin, M&J Valve, Marley, OTC, Pearpoint, Plenty, Power Team, Recold, Robinair, Stone, TCI and Waukesha. It recently traded for $74.63 a share on a mean one-year target estimate of $81.91. The company also pays a modest $1.00 dividend (1.40% yield), after a recent dividend increase, and is priced low relative to its future earnings, with a forward P/E of just 12.36.

SPX Corporation recently announced its 2011 performance. The company reported net income of $186 million bolstered by a revenue increase of 12%. SPX Corporation’s flow technology and test/measurement segments showed especially high growth, at 23% and 16% respectively. Growth in the latter segment led the company to improve its operating margins by several percentage points. It went from 8.3% in 2010 to 10.4% in 2011. Within the flow technology segment, the recent acquisition of global pump technologies supplier CLYDEUNION led to steady operating margins of 13%.

According to Yahoo Finance, analysts are estimating that SPX Corporation’s earnings will increase by 15.13% per annum on average over the next five years, with 6.20% earnings growth forecasted for 2012 and 30.50% for 2013. At these estimates, SPX Corporation has an intrinsic value of $60.81 a share – that’s a difference of 22.73% and too low for my tastes taken alone, but you have to remember that this company has strong opportunities for growth going forward. I do not believe these opportunities are figured into its earnings growth estimates.

SPX Corporation is planning to divest its Service Solutions to Robert Bosch GmbH, the largest auto parts supplier in the world, in a $1.15 billion cash deal. The move will allow SPX Corporation to focus more on its core specialties. With the extra cash flow, SPX Corporation plans to pay down some of its debt and repurchase shares. SPX Corporation also recently announced a new contract to build condensers for the largest-planned geothermal power plant in Kenya. The company’s Flow Technology segment has also garnered a fair amount of attention in recent months.

SPX Corporation’s Flow Technology segment was awarded a contract in February to design and install dairy processing systems for Bright Dairy’s new facility in Shanghai. This is only SPX Corporation’s most recent inroad to the East and the massive market there. In January, the company signed a strategic joint venture agreement with the Shanghai Electric Group to supply its industry-leading products to China’s power sector. Before that, in October 2011, SPX Corporation’s Flow Technology segment entered into an agreement to buy German-based e&e Verfahrenstechnik GmbH, a leading supplier of evaporation, freeze-drying and vacuum sealing technologies used in the food and beverage, pharmaceutical and bioenergy industries. All in all, I think the future looks very bright for SPX Corporation – certainly better than its competitors.

Other companies in the industry, like Emerson Electric (NYSE: EMR), are neck and neck with SPX Corporation, but they lack the forward outlook. Emerson Electric counts such brands as AMS Suite, Baumann, Bettis, Bristol, CSI, Damcos, Daniel, DeltaV, Appleton, ASCO, ASCO Joucomatic, ASCO Numatics, Aperture, Artesyn, ASCO Power Technologies, Astec, Fisher Regulators and Micro Motion to its credit and has roughly the same upside predicted as SPX Corporation – the company recently traded at $50.18 on a mean one-year target estimate of $56.42 – but it offers a much higher dividend of $1.60 (3.20% yield). Emerson Electric is also priced only marginally higher than SPX Corporation, with a forward P/E of 12.63, but analysts are not expecting nearly the earnings increase.

According to Yahoo Finance, they forecast an earnings growth increase of just 11.90% a year on average over the next five years. Its earnings are expected to go up 7.40% this year and 14.40% next year. At these rates, Emerson Electric has an intrinsic value of $48.88, suggesting it too is overvalued by almost 3%, but it doesn’t have the prospects that the SPX Corporation does.

Sure, Emerson Electric has a number of high profile companies, like Apple (AAPL), as customers – and it has had some big contracts recently. In 2010, the company won a contract from Quanta Services (PWR) to supply power inverters and plant-wide controls for one of the largest photovoltaic power generation facilities in the world (it is California’s largest). In 2011, Emerson Network Power, a division of Emerson Electric was selected by Australia’s National Broadband Network Company (NBNCo) to design, supply and install ten network facilities centers across the country in preparation for the rollout of Australia’s National Broadband Network (NBN) for $100 million.

These sound like big deals, and I suppose they are, but they are one-offs – singular income earning opportunities. In contrast, the SPX Corporation has opportunities and acquisitions that offer continual income. I think is the dividing factor. 

Emerson Electric signed two big contracts but then what?

SPX Corporation is exploring a variety of geographic locations for its opportunities. In and of itself a strategy like this provides some natural hedging against macro events. Further, they are largely in emerging economies. This fact provides some hedging against developed nations – after all, emerging nations can grow independently of developed countries – but, more importantly, the opportunity for growth is huge, making SPX Corporation a great buy.


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