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

Smiths Group Going Nowhere Fast

It's never fun, but sometimes companies force you to conclude that your prior assumptions were just wrong (or you can take the time-tested bagholder approach of "I'm not wrong, I'm early!"). In the case of Smiths Group (OTCPK:SMGZY) (SMIN.L), I thought earlier this year that management was on the cusp of delivering the sort of results and portfolio transformations that would show a true break from its not-so-charming past trend of weak growth and questionable capital allocation/portfolio management. Since then, I just haven't seen the sort of follow-through I need to see to maintain that optimism.

To be sure, Smiths isn't a disaster, and fiscal 2018 was the first upturn in organic growth in some time. Moreover, there is still some apparent undervaluation based on what I think are fairly undemanding assumptions. If management can get its "stuff" together - drive better margins in John Crane, turn around or sell Medical, improve Detection, and lay out a more coherent strategic portfolio plan - there's still room for this stock to do better. But in the short term, I believe the disappointments of the past few weeks and months will continue to weigh on sentiment and valuation.

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Smiths Group Going Nowhere Fast

Rotork's High-Quality Business Now At A (Somewhat) Lower Orbit

There are a lot of strong arguments to be made for focusing on high-quality industrial companies like Atlas Copco (OTCPK:ATLKY), 3M (NYSE:MMM), Rockwell (NYSE:ROK), and Rotork (OTCPK:RTOXY), but valuation is often a challenge. I had issues with Rotork's valuation in the past, and its heavy skew to the oil/gas markets has more than outweighed its overall strength in valve actuators and related products in recent years, sending the shares down about 30% since my last update on the company. Even now, the shares are not what I would call conventionally cheap, though the possibility of regaining a premium valuation as its end-markets recover and it expands its business should not be ruled out or ignored by investors willing to embrace a wider perspective on valuation.

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Rotork's High-Quality Business Now At A (Somewhat) Lower Orbit

Flowserve Dog-Paddling While Waiting For Orders To Recover

On a basic level, I think Flowserve (NYSE:FLS) operates an attractive business. The global addressable market for pumps, valves, and seals is around $120 billion to $130 billion and although Flowserve is one of the largest players (and the only one to offer all three major components), it still only has around 3.5% share of the market. As automation continues to move forward, I expect the demand for pumps and valves to increase, and I also believe Flowserve has the opportunity to build or buy its way into end-markets where it has lower-than-average weighting.

In the meantime, though, this is still a very challenging market for Flowserve. The oil and gas markets may be stabilizing, but that's not synonymous with growing and other markets like chemicals, power, and general industrial are still looking for stability. These shares have been lifted along with so many others in the post-election rally, but I would also note that this is a stock that historically has been valued more richly than might otherwise seem fair.

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Flowserve Dog-Paddling While Waiting For Orders To Recover

Seeking Alpha: Stronger Organic Growth Has Investors Excited About Colfax

There are definitely some valid reasons to like Colfax (CFX). Not only is this industrial conglomerate explicitly looking to replicate much of the successful Danaher model, the company has the highest leverage to emerging markets of almost any peer and is likewise leveraged to industries like power generation and oil/gas/petrochemicals where capital expenditures should be strong for several years.

There is a point where enough's enough, though. Colfax shares seem to be pricing in FCF growth of close to 16% (including the recent acquisition of Victor Technologies) and trade at more than 14x 2014 EBITDA estimates. Even allowing that Colfax can be a revenue and profit growth leader in the industrial sector over the next few years, that seems like a steep price to pay.

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Stronger Organic Growth Has Investors Excited About Colfax

Seeking Alpha: Despite Soft Orders, Crane Looking For Market Recoveries In 2014

Like so many other industrial names, Crane (CR) ended up having a pretty good 2013 from a stock performance perspective. Orders weakened around mid-year, leading to three straight book-to-bills below 1.0, but the Street stayed optimistic on the prospect for better sales in 2014, and the benefits to be had from the MEI acquisition. Not unlike many other companies with exposure to fluid handling and aerospace, Crane doesn't jump out as cheap based upon trailing ratios, though the cash flow picture is a little more encouraging.

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Despite Soft Orders, Crane Looking For Market Recoveries In 2014

Seeking Alpha: Rotork Has All The Quality You Could Want

I'm not sure how a reader could fault Rotork (OTC:RTOXY) on the basis of quality. This British industrial company has established leading market share in valve actuators (devices fitted to valves to control them, and the flow of fluid and gas), and actually grew through the 2009 downturn when most industrial companies were seeing significant pressure in their business. Rotork has not just grown, it has grown profitably, with a five-year average return on invested capital over 30%.

Quality isn't the issue with Rotork, but valuation might be. I readily admit that high-quality companies often get and hold a premium multiple. Rotork is also looking to redefine its business once again and expand its addressable market by about a third in the process. I'm not recommending betting against Rotork, but the market already seems to be counting on 10% annual free cash flow growth for the next decade and there are cheaper industrials out there right now.

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Rotork Has All The Quality You Could Want

Seeking Alpha: A More Focused Sulzer Should Be A Better Sulzer

Leading pump manufacturer Sulzer (SULZF.PK) (SUN.VX) hasn't been on the best run of late. Relative to fellow pump players Flowserve (FLS) and Weir Group (WEIGY.PK), Sulzer's performance over the past year (up about 4%) has been pretty poor, due in very large part to a huge miss with second quarter earnings and a three-day fall of nearly 20%.

Admittedly, the company's guidance for fiscal 2013 isn't exciting - sales and order growth in the low single digits - and Sulzer's margins and returns on invested capital have been stepping lower since 2008. That said, this company has 20% to 50% share in its core pump markets and a decision to refocus around its pump and fluid control businesses in markets like oil/gas, power, and water should lead to improved results down the line. Buying Sulzer today is a contrarian move, and a bet on improved operating performance, but one that I don't think is unreasonable given the company's past performance and future potential.

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A More Focused Sulzer Should Be A Better Sulzer

Investopedia: Dover's Opportunities Matched Only By Wall Street's Enthusiasm For Them

Any significant worries about a failure of the second half industrial recovery thesis seem to have been set aside for Dover (NYSE:DOV). With the company deciding to spinoff its Knowles electronic components business and outlining significant opportunities in markets like energy and refrigeration, analysts and investors are on board with the solid potential of this industrial conglomerate. Although Dover is by no means overvalued and should offer better growth than most of its peers, newcomers to the story may just want to wait in the hopes of a better entry price.

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Seeking Alpha: Crane Needs To Reach For Better Performance

What do vending machines, pumps, fiberglass RV panels, and airplane brakes have in common? If you answered "huh?" you win - Crane's (CR) many and varied businesses don't always fit together in the most seamless fashion, and the company hasn't really been a model of shareholder value accretion over the years. That said, this is a company with strong market share in many of its businesses and what looks like a renewed focus on margins. Although today's share price doesn't leap out as a bargain, better execution on the new plan(s) could offer some upside.

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Crane Needs To Reach For Better Performance

Seeking Alpha: Is Gorman-Rupp Overpriced, Or Is Cash Flow Not The Right Metric To Use?

The water industry is a nearly perennially hot topic - almost every investment writer looks at the trends in freshwater infrastructure and eventually writes their "water is the commodity of the future" piece. For better or worse, the long-term potential of many players in the water space is pretty well accepted by investors, and many of these companies sport valuations not only higher than non-water industrials, but higher than what their cash flow would seem to be able to support. So it is worth asking, then, whether the well-run and well-respected Gorman-Rupp (GRC) is indeed overpriced today, or whether discounted cash flow just isn't an effective way to value this stock.

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Is Gorman-Rupp Overpriced, Or Is Cash Flow Not The Right Metric To Use?

Investopedia: ABB's Third Quarter Keeps The Uncertainty High

It seems like the analysis of ABB's (NYSE:ABB) third quarter has a lot to do with an analyst or investor's preconceived notions going into it. ABB fans and bulls found signs of increasing stability and deficits that were neither large nor likely to repeat. More skeptical analysts saw another miss, weakness in orders, and yet another less-than-perfect quarter. I am long these shares, and while I didn't see anything in the third quarter results that scared me, I can understand if other investors would want to wait before adding ABB to their portfolio.

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Seeking Alpha: SPX - A Complicated Power Play

It has been an interesting decade for SPX (SPW), as the company has gone through spasms of acquisition and divestiture but really hasn't set the world on fire with its margins, returns on capital, or free cash flow generation. With most of the business shuffling complete, and broadly improving utility demand, can SPX show that it deserves a spot on a list of quality industrial conglomerates?

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SPX: A Complicated Power Play

Investopedia: Flowserve Looking To Bookings And Margins

It was just the other day that Reuters ran an article highlighting the risk that a building boom in domestic pipelines could be significantly slowed by a shortage of the enormous heavy-duty valves and pumps that such projects require. That sounds like a pretty healthy backdrop for Flowserve (NYSE:FLS) - a veritable pure-play on fluid handling equipment like pumps and valves. The question for Flowserve investors, though, is how much the company can improve its full-cycle margins and how much is already built into the price.

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Investopedia: How Much Is Already In The Pipeline With Flowserve?

One of the realities of the stock market that frustrates less experienced investors is that the Street often foresees growth well ahead of its appearance in the financials ... and when it shows up, the stock is already generously priced. That looks to be a risk with Flowserve (NYSE:FLS) these days. While this industrial company is well-positioned to benefit from ongoing capital spending in oil and gas, power and chemicals, to say nothing of future projects in water, the current valuation already presupposes quite a lot of future business.

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Seeking Alpha: Emerson Doing It The Hard Way

This has been a decidedly mixed quarter for industrial companies, made perhaps slightly more tolerable by consistent management guidance earlier this year that it would be a challenging quarter. That said, Emerson (EMR) has been on a concerning streak of late with uninspiring quarterly performance (relative to expectations) and low order growth. Although management has remained rather consistent in tone and substance, Emerson's shortfalls are increasing turning it into a "show me" story with investors.

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Emerson: Doing It The Hard Way

Investopedia: Can Lindsay Pump Out More Growth?

If only investing were as easy as saying "crop prices are strong, so buy stocks like Potash (NYSE:POT), Deere (NYSE:DE) and Lindsay (NYSE:LNN)." Although global crop prices were indeed strong in 2011, they were actually fairly weak in the latter half of the year and quite a few ag-related stocks have been weak as well. Making matters worse, Lindsay's irrigation business is almost as volatile as the commodities themselves, making this a consummate feast-or-famine type of equity.

A Good Start to the Year  
Lindsay doesn't often do as expected; surprises good and bad are more the norm. In this quarter, it was a good surprise - revenue rose 34% and easily topped the high end of the analyst guesses. Growth was driven by the irrigation business where revenue climbed 68% on fairly equal growth in domestic and international sales. The almost equally volatile infrastructure business saw revenue drop 37%, due in large part to shortfalls in the Quick Moveable Barrier (QMB) business.

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Investopedia: Colfax Makes A Bold Bid

For some companies, M&A is in their DNA. Although most investors have likely never heard of fluid-handling specialist Colfax (NYSE:CFX), the company's major shareholders are the founders of Danaher (NYSE:DHR) and investors familiar with that conglomerate's long acquisitive history will see a similar story here. What is most remarkable about this most recent proposal, though, is its sheer audacity - if Colfax succeeds in acquiring Charter International (Nasdaq:CHITY), it will dramatically increase the company's debt load, revenue base and market exposure.


The Deal That May Be
It should be noted immediately that while Charter's board supports Colfax's bid, it is not a sure thing yet by any means. Nevertheless, Colfax has offered $2.4 billion in cash and stock for Charter International - a remarkably large bid given Colfax's present market capitalization of about $900 million.

Colfax is proposing to acquire Charter for 910 pence (about $14.45) per share, a 7% premium to the standing offer from Melrose to acquire Charter. That 7% premium may not sound remarkable, but Colfax is offering a package that includes about 80% cash, while Melrose's bid was only 35% cash. Based on current expectations, Colfax is offering about 0.75 times estimated 2011 sales, 8 times estimated 2011 EBITDA, and a little less than 14 times estimated 2011 earnings per share. (For related reading, see A Clear Look At EBITDA.)



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Investopedia: Diverse Markets Boosting Dover

So far this has been a solid quarter for a wide range of industrial conglomerates. Investors can add Dover (NYSE:DOV) to this list, as ongoing strength in markets like materials handling, fluid management, microphones, and frequency control products are helping this relatively small industrial conglomerate post very attractive revenue and order growth. 

An All Around Solid Second Quarter  
Arguably the worst that can be said about Dover's second quarter performance is that it did not beat the analyst estimates by a huge amount. Nevertheless, the company reported 21% top line growth, 14% organic revenue growth, and order growth of 15%. 


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