SPX Technologies (NYSE:SPXC) started 2024 with a follow-up deal, adding to its string of deal-making efforts of late. M&A efforts have driven true transformation over the past five years or so, and while revenue hasn't grown, grown, the business became much more profitable and sustainable.
This story being well understood by the market, investors subsequently assigned premium multiples to the shares, a little too demanding in my opinion, leaving the shares here more than fully valued.
Trading at a current multiple in the mid-20s, execution has been more than expected, although supported by an impressive performance. Weighing it all together, I still recognize the strong performance, but I don't feel the need to chase the stocks here.
Increase Canadian visibility
SPX has entered into an agreement for acquire Ingénia, a Canadian company based in Mirabel Technologies in $300 million deal. Ingenia designs and manufactures custom air handling units, typically used in high precision and reliability contexts such as healthcare, pharmaceutical, education and industrial markets, among others.
With a sales contribution of US$100 million, SPX paid a multiple of 3 times its sales for the company, with margins and growth above the average of the HVAC segment, the unit in which the activities will be housed within SPX.
The company has now amassed a real acquisition track record, as this is the 14th acquisition since 2018, having been instrumental in its successful transformation in recent years, with shares hitting new all-time highs at $109 in time of writing this article. .
Putting the deal in perspective
In November, SPX job its third-quarter results for 2023, and they were very strong, with sales up 21% to $449 million, with full-year sales around $1.75 billion. Sales growth in the third quarter was fairly evenly split between inorganic growth and the impact of acquisitions.
The vast majority of the business is made up of the HVAC segment, which is expected to generate just over $1.1 billion in revenue this year, or about two-thirds of total revenue, supplemented by a detection and measurement of more than 600 million dollars. HVAC focuses on cooling, where SPX is benefiting from the boom in data centers and the semiconductor sector, as well as heating, with businesses and consumers moving away from gas heating, among others.
Despite a significant difference in size, the two segments have margins of around 20% per segment. With the company's reported operating margins in the mid-15s, the company now sees full-year adjusted earnings around a midpoint of $4.27 per share. Needless to say, multiples require adjusted earnings of 25 to 26 times.
With net debt reported at the time at $573 million, this pro forma net debt will increase to approximately $873 million, becoming substantial with adjusted operating profits amounting to approximately $300 million, while depreciation charges are rather minimal. That being said, based on margin commentary, Ingenia is expected to add at least $20 million to operating profit going forward. This works out to a leverage ratio of approximately 2.7 times EBITA, or a slightly lower leverage ratio based on EBITDA multiples.
With 47 million shares trading at $109, the company has a stock valuation of $5.1 billion and a pro forma enterprise valuation of approximately $6.0 billion. This implies that the company itself is trading at 3.3 times its pre-trade sales. While the purchase doesn't seem very cheap, it's likely accretive to SPX due to its own premium valuation here.
Continued progress in an impressive transformation
SPX Technologies was spun off from SPX Corp in 2015 and was a $1.8 billion company at the time, with sales largely comparable to today. This seems like a huge disappointment, but it's the opposite. After all, the company relied heavily on a billion-dollar energy business, with margins that were both lower and more cyclical, with the HVAC and sensing and measurement businesses being much smaller.
A stock at just $10 had profits around a dollar, while debt was high, with the real transformation taking place in 2021 when the former energy business was sold, with the proceeds used for deleveraging and the conclusion of additional agreements. This included a $125 million deal for TAMCO, as announced in April last year, followed by a $418 million deal for ASPEQ in May last year, as closing throughout the he year means that 2024 will naturally become another year of growth.
The transition has been impressive, as ten stocks have been sold over the past decade, while total sales have remained stable, with valuations quite high in the mid-20s, against a backdrop of a 2.5 leverage ratio. times. Again, the company has set ambitious goals for 2025, calling for revenue above $2 billion, but more importantly earnings above $5 per share. Even if this goal is achieved, a forward multiple of 22 for 2025 seems quite demanding, even though SPX has quickly amassed a very impressive track record in just a few years.