Enpro In The Early Stages Of A Transformation Toward Better Growth And Margins

 

It is not unreasonable for investors to be skeptical about corporate transformation stories, but I think Enpro (NPO) (the company recently rebranded itself as “Enpro” instead of “EnPro”) is making a solid case that they are serious about improving the business and reversing over a decade of underwhelming performance. Management has sold $500M of “stagnant” legacy assets, acquired $600M of more dynamic assets, and continues to implement lean initiatives, not unlike those used at Danaher (DHR) and other high-performing multi-industrials.

There’s definitely more work to do, and M&A is going to feature prominently in that, with the company espousing an approach similar to that Ametek (AME), Danaher, Graco (GGG), or IDEX (IEX) – a focus on defensible leading niches in attractive growth markets (7% or better growth) and healthy margins.

With improving end-market demand, more opportunities to drive margin improvement through lean initiatives, and a willingness to continue selling under-performing assets (while acquiring more promising assets), I think this is a name worth watching. If management can drive revenue growth of around 4% and get FCF margins into the low double-digits on a sustained basis, the shares can support a triple-digit valuation.

 

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Enpro In The Early Stages Of A Transformation Toward Better Growth And Margins