EnPro Becoming A Slimmer, More Profitable, And Less Cyclical Multi-Industrial

EnPro (NYSE:NPO) management has been transparent about its intentions to continue to remake the company into a more niche-oriented multi-industrial focused on less-cyclical, faster-growing markets, and with a product portfolio more skewed to high barriers to entry driven by engineering and sticky customer relationships. With the sale of GGB done, EnPro goes into 2023 focused on its specialty Sealing Technologies and Advanced Surface Technologies businesses, both of which offer better growth and margins than the company's historical trends.

These shares have done well since my last update, appreciating more than 15% and beating both the S&P 500 and the wider industrial group.

I do see some near-term sentiment risk for EnPro, as the company is heavily dependent upon the semiconductor industry and still has meaningful exposure to cycle markets like heavy-duty trucks and short-cycle "general industrial". While 2023 likely won't be a banner year, I do think the company is well-placed for organic growth in the mid-single-digits and strong EBITDA and free cash flow margins. The shares aren't particularly cheap now, and I'd rather wait in the hopes of a pullback, but I like the strategy management is following, and I think EnPro can be a long-term outperformer in the multi-industrial segment.

 

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EnPro Becoming A Slimmer, More Profitable, And Less Cyclical Multi-Industrial

Enpro Has Continued To Pivot Toward Less Cyclical, More Profitable Business

At a point in the cycle where the market really isn’t fond of short-cycle industrial exposure, Enpro’s (NYSE:NPO) decision to shift toward faster-growing, higher-margin, and less typically cyclical business is looking better and better. Since my last update, not only has the company steadily beaten expectations (including full-year results that were comfortably above my expectations), but the shares have outperformed the broader industrial group by almost 15%, with a 16% total return that also surpasses what the S&P 500 has returned.

Given Enpro’s greater leverage to a faster-growing semiconductor end-market, my long-term revenue growth estimate moves from around 4% to between 5% and 6%, and I see stronger long-term FCF margins as well. I still see these shares offering more than 10% near-term upside, as well as long-term total annualized return potential in the high-single-digits, which is better than what most industrials are offering today.

 

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EnPro Has Continued To Pivot Toward Less Cyclical, More Profitable Business

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

Seeking Alpha: EnPro: Another Strong Small Industrial With Questionable Value

Small-cap industrials can be a great source of alpha-generating investment ideas. In many cases, investors would rather spend their time on the latest hot tech idea than dive into the nitty-gritty of pumps, bearings, hydraulics and the like. That said, while EnPro (NPO) is hardly a household name, it's not immediately obvious that this small industrial components company is significantly undervalued at today's prices.

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EnPro: Another Strong Small Industrial With Questionable Value