|Shares Out. (in M):||44||P/E||0||0|
|Market Cap (in $M):||1,510||P/FCF||0||0|
|Net Debt (in $M):||961||EBIT||0||0|
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SPX FLOW is a value play on the bottoming out and potential cyclical upturn in industrial end-markets. An ongoing restructuring and cost savings program that represents ~40% of 2014 peak Ebitda and 7% of 2016 revenue should result in a company capable of generating ~$3.50 per share of trough free cash flow in 2018E (~10.1% yield) on a revenue base that will be down >30% from peak-to-trough. Recent industry commentary and FLOW’s 4Q16 order trends indicate stabilization/the beginning of underlying growth in end-market demand. Any meaningful rebound in FLOW’s depressed oil & gas and dairy end-markets could result in $4.00+ of free cash flow by 2019E. A large one-time pension contribution in 2016, elevated capex from its Poland facility expansion, and cash payments related to the restructuring have masked the normalized cash flow profile of the business. But with restructuring expenses expected to mostly conclude by the end of 2017E, we expect actual free cash flow in 2018E to begin to inflect. We also expect FLOW’s leverage (currently ~4.1x) to start trending down from both Ebitda growth and cash generation and the stock to begin to narrow its valuation gap with peers. At a conservative 12.5-15x FCF (versus US flow control peers currently at 18-30x), the stock could be worth $50-60 in 12-24 months (+44-73%).
SPX FLOW is a pure-play flow control company and global supplier of highly specialized engineered solutions consisting of pumps, valves, mixers, filters, hydraulic tools, heat exchangers, etc. It sells original equipment/components/systems (65% of revenue) along with aftermarket parts and services (35% of revenue) to its installed base of customers in the oil/gas, dairy, chemical, power generation, and other various industries. FLOW has three reportable operating segments, Food & Beverage, Power & Energy, and Industrial.
The company was formed through a series of acquisitions by SPX Corp (SPXC), with the largest and last being the $1.1bn acquisition of ClydeUnion in Aug 2011. After a failed acquisition of Gardner Denver in 2013, activists pushed SPXC to focus on profitability as opposed to “growth-at-any-cost.” This set in motion the ultimate decision in Oct 2014 to spin-off FLOW (trading as a separate entity began in Sept 2015 at $37.50 per share).
Food & Beverage:
Power & Energy:
The Restructuring Program:
Free Cash Flow Valuation:
An inflection in orders from improved industrial capital spending (including from any government infrastructure bills) and/or the unexpected announcement of large orders that are not included in current guidance.
· Free cash flow generation and the reduction of leverage.
· Positive updates on the progression of the restructuring program and/or an increase to the cost savings targets.
· Industry M&A validating the high multiples being reflected by the peer group.
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