Q:Have fears over oil and gas led you to other opportunities lately?
A: SPX Corp. ( SPXC ) spun off its flow-related business called SPX Flow ( FLOW). This is a brand new company and shares traded at about $49 [late September], but have been down about 10% since, so it’s attractive to us. About 30% of its revenue is in industrial equipment, chemical treatment and air processing, 35% of it is food and beverage processing, and 35% is power and energy. That’s a little bit of a misnomer leading to some neglect and to some fear here because it’s a newer company, and there aren’t many people who are completely familiar with it. Only about 14% of the total company is upstream oil and gas or about a third of the power and energy segment.
Q:What do you like about the company?
A: SPX Flow has been restructuring. They’ve improved operating margins by [two percentage] points since 2011 and just recently increased their operation improvement goal by [one to three percentage] points over current levels, or moving from about 13% to about to 14% to 16%. We think there’s more to do after that, but that’s their current goal and some of those savings come from footprint globalization, meaning sourcing and where they manufacture.
There’s a great cash flow story here. It’s a little more levered than we like at 2.2 times debt to Ebitda [earnings before interest, taxes, depreciation and amortization] but it’s not distressed at all. They can produce $100 million to $120 million of cash flow annually and can pay down that debt if they choose to do so. The stock right now at $32 is worth $47 or just over 18 times 2016 estimated earnings per share.
Rewey also mentioned long-ago Ford(F) spinoff Visteon(VC) as a company he likes which will be returning copious amounts of capital to investors.
Disclosure: Author holds no position in any stock mentioned