Alfa Laval: Impressive Order Growth, Benefitting From Rotation To Longer-Cycle Names

 

In what has been a strong quarter for multi-industrials, the breadth and depth of Alfa Laval’s (OTCPK:ALFVY) end-market improvements still stand out. There are some softer spots here and there, but core markets like food/beverage and HVAC-R remain very strong, while marine, process industries, and oil/gas are already coming back.

Alfa shares have jumped almost another 40% since my last update in early April, handily trouncing other industrial names over that period. While I think Alfa was and is a quality multi-industrial that institutions wanted to find excuses to own (and beat-and-raise quarters provide that), I also think Alfa is benefiting from a shift away from shorter-cycle markets toward longer-cycle stocks. It’s going to take significant additional upgrades to Street estimates to justify today’s price over the long term, but in the short term this is a hot hand in the multi-industrial space.

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Alfa Laval: Impressive Order Growth, Benefitting From Rotation To Longer-Cycle Names

Alfa Laval Trading On Par With Other Quality Industrials, And Offering A Clean-Tech Kicker

 

There are several secular growth stories out there for investors, including electrification, automation, and data growth, but clean energy technology (including decarbonization) has been getting its time in the spotlight more recently. With strong technologies in heat transfer, separation, and fluid handling, the Street has started to appreciate Alfa Laval’s (OTCPK:ALFVF) (OTCPK:ALFVY) leverage to this opportunity, as well as the leverage in the Food/Water business to alternative proteins.

When I last wrote about Alfa Laval in August of 2020, I suggest investors hold off in the hope of a lower price. They got that chance with a roughly 20% decline from early August to late October, since which the shares have risen almost 50%.

At today’s price I think Alfa Laval offers a return potential on par with other high-quality industrials, many of which also have leverage to attractive long-term secular themes (Eaton (ETN), Emerson (EMR), Honeywell (HON), Schneider (OTCPK:SBGSF) (OTCPK:SBGSY), et al). I think it’s a decent enough hold at this level, but near-term expectations may yet be a little high and if there’s a sell-off after Q1 earnings/guidance, it’s a name I’d revisit.

 

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Alfa Laval Trading On Par With Other Quality Industrials, And Offering A Clean-Tech Kicker

Alfa Laval's Proposed Acquisition Adds Capital Deployment To The List Of Investor Worries

On the whole, I've liked Alfa Laval (OTCPK:ALFVY) more than the Street, and that has worked out okay, with the stock more or less performing in line with the S&P and beating its industrial peer group. Now, though, the company has made a controversial decision to pay a high premium to buy its way into the valve market - a decision that, in the short term at least, will only magnify concerns about the company's exposure to weak end-markets like oil/gas and petrochemicals.

I can understand the long-term argument for acquiring Neles, and I'm certainly not going to ignore the idea that the premium multiple Alfa is offering is inflated by weak current conditions. Moreover, if investors are constantly advised to try to buy into weakness, doesn't the same apply to companies? All of that said, I think there were better options for Alfa, and I think this is a deal that could weigh on sentiment until management can show real deliverables on the deal.

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Alfa Laval's Proposed Acquisition Adds Capital Deployment To The List Of Investor Worries

Worries About Oil And Marine Have Alfa Laval Trading Much More Reasonably

I wasn’t all that excited about Alfa Laval’s (OTCPK:ALFVY) share price back in December, but that was before Covid-19 scrambled the markets and threw the outlook for almost every industrial company out the window for at least the next two quarters, and possibly quite a bit longer. With the shares down about 25% since then, modestly underperforming its peer group, the valuation is now once again more reasonable for long-term investors.

“Long-term” really is the key here, as there are significant near-term concerns about the outlook for orders in the marine and oil/gas markets – two major end-markets that collectively account for over 40% of Alfa Laval’s business. Opportunities in HVAC, pharmaceuticals, food/beverage, and industrial end-markets offset this to some extent, but Alfa is likely looking at a more protracted recovery than its shorter-cycle peers, and could weigh on sentiment and share price performance even with a good valuation.

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Worries About Oil And Marine Have Alfa Laval Trading Much More Reasonably

Alfa Laval's Resiliency Back In The Share Price

There are some stocks out there that always (or almost always) get the benefit of the doubt when it comes to valuation – names like Atlas Copco (OTCPK:ATLKY) and Danaher (DHR) spring to mind pretty readily – and then there are names where it seems like the market is more apt to just somehow “forget” the underlying quality of the business, and I think Alfa Laval (OTCPK:ALFVY) fits in that group. While there are undeniable cyclical parts to the business, I believe the volatility in the share price is outsized for a company with a good full-cycle track record when it comes to returns on invested capital, free cash flow, and other metrics.

I thought the market was overly spooked by second quarter results and guidance and that the shares looked appealing back in July. With a nearly 30% move in the ADRs since then, as part of a bigger rally in many industrial names, the undervaluation is more or less gone now and the annualized prospective returns seem more in line with the 6% - 8% range that is common now for quality industrials (Dover (DOV), Honeywell (HON), Rockwell (ROK), et al). As such, I think Alfa Laval is a decent hold and a name to consider adding on pullbacks along the way.

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Alfa Laval's Resiliency Back In The Share Price

Alfa Laval Swamped By Surprisingly Weak Marine Orders

Writing about Swedish conglomerate Alfa Laval (OTCPK:ALFVY) (ALFA.ST) after first quarter earnings, I said, “Give me a 10% to 15% pullback and these shares get much more interesting as a potential long-term holding.” With disappointing orders in the second quarter and increasingly shaky investor sentiment around industrials, Alfa Laval shares have now pulled back a little more than that 15% target.

In the short term, there are still risks. Alfa is benefiting from record high orders in Energy, and I’m not confident that that is sustainable. Elsewhere, ship contracting has been below expectations, raising some concerns about the near-to-medium-term outlook for the Marine business. Still, this is a quality multi-industrial leveraged to multiple attractive trends, and while this may not be the bottom, I think the price is attractive for long-term investors.

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Alfa Laval Swamped By Surprisingly Weak Marine Orders

Low Expectations And Portfolio Transformation At SPX Flow

When I last wrote about SPX Flow (FLOW), I wasn’t too enamored with the stock, as the company’s orders seemed underwhelming relative to the cycle and I didn’t like the near-term prospects for growth and margin improvement. Since then, the shares are down about 10% (including a strong post-earnings move), lagging the broader industrial sector by close to 20%, not to mention peers/rivals like Alfa Laval (OTCPK:ALFVY) and Flowserve (FLS) – in fact, until this post-earnings spike, the shares had been lagging troubled GEA Group (OTCPK:GEAGY), and that’s really not a good thing.

I don’t believe SPX Flow is a vastly better business today than a year ago, but I have seen progress on margin and portfolio improvement efforts, the most obvious example being the decision to look to divest the lower-margin Power & Energy business, but also including subtler moves like deprioritizing larger dairy orders. What’s more, the expectations embedded in the business seem quite low. I do have some concerns that this could be a value-trap, but the value proposition is interesting.

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Low Expectations And Portfolio Transformation At SPX Flow

Alfa Laval Buoyed Again By Strong Marine Results

As has been the case for most multi-industrials, particularly in the capital goods sector, Alfa Laval (OTCPK:ALFVY) (ALFA.ST) has shaken off some of the malaise that had pushed the shares down until relatively recently – while Alfa has outperformed its industrial peers since my last update, the 6-month and 12-month comparisons have Alfa lagging the market as sell-siders and investors have grown worried about what will happen as scrubber orders start to fade.

Although I’m not wild about the valuation (nor the valuation on industrials more broadly), this is still a company that I like quite a bit. I think there’s more opportunity in marine than just scrubbers, and I think longer-term opportunities in food, beverages, life sciences, and HVAC are not always given their due. Give me a 10% to 15% pullback and these shares get much more interesting as a potential longer-term holding.

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Alfa Laval Buoyed Again By Strong Marine Results

With LNG Opportunities Coming Into View, Chart Industries Looking More Exciting

Chart Industries (GTLS) is almost equal parts exciting and frustrating today – exciting because the opportunity in small-scale LNG has never looked better, and frustrating because it’s difficult to time orders and revenue and the recent resegmentation of the business creates some modeling challenges. All told, though, while I do have some concerns about the valuation and the near-term outlook for the company’s legacy industrial gasses business, the opportunities in natural gas, LNG, and growth segments within industrial gasses are pretty compelling.

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With LNG Opportunities Coming Into View, Chart Industries Looking More Exciting

A Tug Of War With Alfa Laval Between Weak Sentiment And Post-Peak Growth

The market definitely didn’t like Alfa Laval’s (OTCPK:ALFVY) fourth quarter earnings, and particularly the parts of the call where management said things like first quarter demand being “somewhat higher” than the fourth quarter and that demand was “nearing the peak” for the cycle. Although Alfa shares are up slightly from my last update on the company, the shares lost about 10% of their value in the immediate aftermath of the fourth quarter report and have since recovered about half of that.

Operationally, I like Alfa Laval. I think this is a well-run company with good exposure to late-cycle end-markets, but I also know that orders are likely to slow dramatically in 2019, with revenue and earnings following in 2020 and 2021. These shares do look undervalued now, and I think the market may be overlooking opportunities in HVAC, power gen, life sciences, and ballast water treatment, but the reality is that fighting the tape is tough and investors are going to need to have some patience with this one.

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A Tug Of War With Alfa Laval Between Weak Sentiment And Post-Peak Growth

Between Soft Guidance, Erratic Orders, And Flat Margins, It's Tough To Love Wartsila

I liked Finland’s Wartsila (OTCPK:WRTBF) (WRT1V.HE) back in late 2016, and for about two years that call worked, as the company benefited from an improved mix in its Marine Solutions business and good order momentum driven by the need for commercial shippers to install scrubbers ahead of IMO2020 pollution regulations. What hasn’t been so good, though, is progress on margins, with the company’s cost-cutting efforts offset by increased price competition in its business – a particularly disappointing development given generally good share – and a less profitable revenue mix.

This year (2019) should see Wartsila deliver some of the best revenue growth among multi-industrials as it delivers on its record order book, but orders seem likely to flatten out, and margin leverage is probably a 2020 event and I don’t have a lot of confidence that the company will reach its 14% target in the next five years. While Wartsila does look undervalued and should benefit from improving power gen orders at some point, this is a hard company for me to trust at this point and there are a lot of industrials with similar or better undervaluation and both less volatile business mixes and more credibility on hitting their margin targets.

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Between Soft Guidance, Erratic Orders, And Flat Margins, It's Tough To Love Wartsila

Market Worries Overshadowing Ongoing Strength At Alfa-Laval

Alfa-Laval's (OTCPK:ALFVY) shares have corrected sharply since my last update on the company, with the shares down more than 20% on what has been a pretty broad-based downturn for European industrials. Although there are some valid concerns about Alfa’s business mix in 2019 and the need for higher capex spending to support a surge of scrubber orders, there aren’t enough company-specific issues here to think this is more than a broad-based re-rating.

I thought Alfa-Laval wasn’t as appealing of an investment prospect back in July, but I didn’t exactly expect the sell-off we’ve seen in the market since then. While the valuation is definitely more interesting now, there are a lot of other industrials getting cheaper now and I’d be careful about stepping in front of this current market downturn. Still, as one of the better late-cycle names I know, I think this is a name to look at going into 2019.

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Market Worries Overshadowing Ongoing Strength At Alfa-Laval

GEA Group Starting To Get Interesting

Down another 10% or so from when I last updated readers on the company, GEA Group (OTCPK:GEAGY) (G1AG.XE) has more or less lived down to my expectations as this company is largely marking time ahead of a management transition. Since that last update, though, the company has reported a decent quarter, has announced the new CEO, and has seen improvements across most of its end markets.

GEA Group still needs a lot of restructuring work, and that work is going to take years to accomplish. Still, I’m starting to think that the investment case is more interesting here. While I do incorporate business improvement expectations into my model (improvements that may not come), I believe that if GEA doesn’t make relatively quick restructuring progress, activist shareholders will push hard for a sale of the company. With a fair value of a little over $40/ADR, this may be a name for investors with the patience to hold a turnaround story to start looking into more closely.

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GEA Group Starting To Get Interesting

A Better Quarter From Colfax, But Plenty Of Work Still To Do

Healthier demand in manufacturing and heavy industry is positive tide that is lifting a lot of boats these days, and Colfax (CFX) too is seeing some benefit. While the company continues to go through a painful adjustment process in its Air & Gas Handling business, the trend should start to improve relatively soon and there seems to be room for more growth in multiple end-markets. Management also seems to be more inclined to restructure and buy back shares rather than add a new business group, and that looks like a smart decision on balance for the time being.

I’ve been clear in the past that I have serious doubts about this business; I am not sold on the long-term value of the Air & Gas Handling business and I think the company will struggle to make real headway in welding. That said, low expectations, a relatively high short ratio, and improving end-market trends, coupled with what looks like responsible decisions on the part of management, does support value here even after a decent run over the past couple of months.

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A Better Quarter From Colfax, But Plenty Of Work Still To Do

Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Crane (CR) has always been a bit of an odd duck. While there are plenty of multi-industrials out there, Crane’s $3 billion revenue base and $5 billion market cap makes it a small player among the conglomerates and one with a fairly unusual (albeit very diverse) mix of end-markets. It’s also not especially widely-followed, with only about a half-dozen sell-side analysts covering it and less than 75% institutional ownership. Now add in some odd trends and market signals, and this is a somewhat challenging story to evaluate.

I didn’t like Crane’s valuation back in February of this year, and the shares have underperformed the broader industrial group since then (as well as the S&P 500) with a roughly 10% decline. Now, though, there seems to be growing momentum in the Fluid Handling and Aero businesses, and margins seem to be coming along a little better than expected. If Crane’s late-cycle exposure bears it out as a late bloomer, this could now be a time to consider the shares.

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Amid A Lot Of Mixed Signals, Crane Seems To Offer Some Value

Multiple Tailwinds Filling The Sails For Chart Industries

Chart Industries (GTLS) has been through some tough times in its past, but the outlook today is much brighter as multiple tailwinds come together to push results, estimates, and the share price higher. The shares have more than doubled over the past year, and climbed close to 60% just on a year-to-date basis, as the company continues to see strong demand from gas processing, vehicle fueling, industrial gas, and newer opportunities like space vehicles.

Chart Industries has significant untapped potential operating leverage and the double-digit revenue growth I expect over the next few years should push margins into the double-digits. Better still, LNG liquefaction orders remain a very significant potential positive driver in the coming years as global LNG demand continues to rise. That said, today’s price does assume quite a lot of growth already and this is more of a momentum-based story driven by the ongoing top-line outperformance and growing order book.

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Multiple Tailwinds Filling The Sails For Chart Industries

Alfa Laval Flexing Its Late-Cycle Muscles

I liked Sweden’s Alfa Laval (OTCPK:ALFVY) (ALFA.ST) earlier this year as a late-cycle play on stronger Marine and Energy orders, as well as decent prospects for ongoing growth in the Food/Water business. Much of that has come to pass, and the shares are now about 20% higher than they were at the time of that last article. Alfa Laval has since logged two very strong quarters, and those hoped-for improvements in the company’s three main business lines have materialized with stronger revenue, orders, and margins.

With the strong move in Alfa Laval’s share price, not to mention some growing concerns about how much is left in this current industrial upswing, I believe these shares have moved from good idea to okay idea. The implied long-term return is still in the high-single digits, which isn’t bad, and I won’t be too surprised if the company has at least one more better-than-expected quarter up its sleeve. Still, I wouldn’t push my luck too far, even though I regard this as a well-managed operator in some attractive businesses.

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Alfa Laval Flexing Its Late-Cycle Muscles

SPX FLOW More Focused, But Iffy Order Flow Is A Concern

Investors are trying to figure out where industrials are headed, and SPX FLOW's (FLOW) share performance so far this year reflects a lot of that uncertainty. The market liked what management had to say at its early March investor meeting (after which the shares traded into the mid-$50's), but disappointing results and guidance across the sector had investors worried going into earnings, taking the share down into the low $40's, before the results brought some stability to the shares.

It's an interesting coincidence (and perhaps not just coincidence) that SPX FLOW's share price performance puts it almost directly in the middle of Alfa Laval (OTCPK:ALFVY), better-run and with better near-term prospects, and the rolling train wreck that is GEA Group (OTCPK:GEAGY). Although the shares seem to have a little bit of upside here, I'm concerned that the Food & Beverage business could stay weaker for longer and that management may not be able to maximize the opportunities in the power and energy rebound.

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SPX FLOW More Focused, But Iffy Order Flow Is A Concern

Change Is Coming At GEA Group, But It May Take Time To Arrive

When I last wrote about GEA Group (OTCPK:GEAGY), I said there were still meaningful risks that the company could disappoint investors even further… and that's exactly what they have done. With yet another weak quarter in the books, and no credible prospects for a near-term reversal in what is now a long trend of disappointment, this is a tough stock to own today.

There are some pieces of good news, though. First, the management that steered GEA Group into this mess is on their way out. Second, the underlying assets and operations still have value and, I believe, can generate attractive returns with the right plan/management in place. Although the shares still look undervalued after once again lowering expectations and could have significant long-term turnaround potential, investors buying/holding today should probably accept that it's going to be a year or longer before there's real change at GEA Group.

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Change Is Coming At GEA Group, But It May Take Time To Arrive

Outside Of Energy, SPX Flow Still Waiting For The Turn

At a time when many industrial companies are seeing strong cyclical recoveries, SPX FLOW (FLOW) is still well off the pace of many of its industrial peers. Although markets like energy, air treatment, and chemical processing still have scope to improve from here, the company's food and beverage segment is likely to be a slower grower and SPX FLOW is going to have to start making more progress on share-of-wallet and internal margin improvement efforts.

Up more than a third from when I last wrote about the stock, I'm not as bullish on SPX FLOW now as I think the catch-up opportunity has largely materialized. There are multiple places where management could execute better over time, but I think those opportunities have to be considered in hand with the likely slower growth that SPX FLOW will see compared to many other industrials. I don't dislike the shares, but I don't see the opportunity I once did.

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Outside Of Energy, SPX Flow Still Waiting For The Turn