SPX Corp. (SPXC) is an undercovered stock on this platform, and while many investors took note of the spin-off of SPX Flow (NYSE:FLOW), which already took place in 2015 again, lack of coverage of the former parent company has been seen in recent years.

What has happened with SPX Corp. in the meantime, but more important is it a good investment? Let’s explore.

Throwback To 2015

SPX Corp. spun off SPX Flow in 2015, with the Flow division actually being slightly larger at the time. SPX Corp. generated $1.8 billion in sales that year, on which it reported core EBITDA of $164 million, a number expected to grow to $180-$200 million.

The company operated in a range of industries, some of which quite compelling, while others faced some challenges. End markets included HVAC, power transformers, detection & measurement and power generation, with HVAC and detection & measurement earmarked as growth engines by the company itself.

Nonetheless, power made up little over half of sales back in 2015, in fact nearly a billion in revenues, on which just mid-single-digit EBITDA numbers have been reported. HVAC generated $550 million in revenues and mid-teens EBITDA numbers, making it more profitable than power. While detection & measurement was just a quarter of a billion business, it generated margins in excess of 20%.

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Truth be told, expectations were quite low since the spin-off with shares of SPX Corp. trading just around the $10 mark at the time. The reason for that was quite simple and that is that 2015 sales (as reported in 2016) were down, driven by weakness at power and HVAC. Net debt of $274 million translated into 2.5 times leverage as the company guided for core earnings of $0.95-$1.25 per share, a big improvement from the $0.52 per share reported in 2015. While this translated into low earnings multiples, note that these were adjusted earnings.

During 2016, the company announced two small divestments, and this resulted in flattish sales of $1.4 billion in both 2016 and 2017. As the company reported adjusted earnings of $1.47 and $1.78 per share respectively for both years, leverage ratios were coming down rapidly amidst improving earnings. This resulted in the shares recovering to their twenties, yet top-line sales were anything but impressive.

In 2018, the company made three nice acquisitions to bolster its detection and measurement business, while reducing reliance on the power business. Together with some bolt-on acquisitions reported in 2019, the company has been able to deliver on quite some transformation. 2019 sales revealed revenues of $1.53 billion, and while this is down 15% from 2015 and looks quite dismal, a real transformation has taken place.

The Transformation

HVAC remains one of the dominant drivers of SPX Corp., and with sales of $593 million in 2019, after adjusting for some acquisitions, there is no great improvement from the $550 million revenue number in 2015, as segment margins of 16% are quite impressive.

Detection & measurement has grown from a quarter of a billion business to $385 million as a result of acquisition and organic growth, with margins approaching 24%. The last segment is engineered solutions, leftover from the power business with sales of $550 million and margins of 8% as the company has moved to a steadier and less risky revenue base. With adjusted operating income of $172 million and D&A running at $34 million, EBITDA just surpasses $200 million. Net debt stood at $339 million for a 1.6 times leverage ratio based on the bank definition.

For the year, the company reported a GAAP profit of $1.67 per share and adjusted earnings of $2.76 per share. Truth is that management has kept its promises and transformed the business, making it less risky, more profitable, and more diversified over the past five years, although top-line sales growth is a bit soft. Based on the adjusted earnings and moderating leverage, shares had risen to $50 earlier this year, before selling off amidst Covid-19 and now having recovered to $43 per share. Investors were furthermore comforted at the start of the year with the 2020 guidance, calling for sales to rise to $1.6 billion as adjusted earnings would improve towards $3 per share.

Surprisingly, the business has been quite resilient, or perhaps not a great surprise, although flattish results in combination with bolt-on deals pursued over the past year suggest some organic revenue declines in the recent quarters. For the quarter ending late in June, the company reported stable revenues and margins as it is somewhat surprising to see that measurement and detection business was one of the softer spots. Net debt of $393 million inched up on absolute terms, but remains very manageable on a relative basis at 1.5 times EBITDA.

Final Thoughts

Truth be told, based on an original outlook for $3 per share in adjusted earnings, shares traded at a market multiple ahead of the Covid-19 turmoil. The HVAC business deserves a market multiple in my book, as measurement and detection could be a more valuable activity while everything related to power does not. Hence, shares were probably fairly valued with modest leverage as management has done a good job in improving the business, marking targeted transformation efforts, over time recognized by the market.

While shares are still down quite a bit from the pre-Covid-19 highs, they still trade up year over year, and quite frankly, I do believe that shares are largely fairly valued over here. Nonetheless, SPX is an interesting stock to keep watching as complete phase out of power might make it potentially an acquisition target, as a real premium valuation of measurement and detection could be unleashed. Hence, I continue to keep an eye on the shares from here, yet here and now, I can only conclude that shares are largely fairly valued and congratulate the long-term holders and management on a job well done.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.