SPX Technologies, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

SPX Technologies, Inc. is a diversified industrial company that designs, manufactures, and markets a variety of products and technologies, primarily focusing on heating, ventilation, and air conditioning (HVAC), detection, and measurement sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

SPX Technologies, while diversified, does not have a wide economic moat, but has certain business segments that have a narrow one. We provide them a moat rating of 2/5

Moat Analysis:

SPX Technologies does not possess a wide economic moat across all its segments. However, certain aspects provide it with a narrow moat:

Proprietary Technology and Specialized Expertise: In some of its niche markets, particularly within the HVAC segment, SPX leverages proprietary technologies, and specialized engineering expertise to secure recurring revenue streams with its clients. The products are very complex, requiring many years of know-how to deliver the required quality and performance for clients, providing a certain amount of lock-in. For example, the company’s offerings in areas like industrial and commercial heat transfer equipment, where its engineering expertise and customized solutions give an advantage, have some competitive differentiation.
Established Relationships and Brand Recognition: In the detection and measurement solutions segment, SPX has forged long-term partnerships with its customers which, combined with an established brand reputation, has resulted in more reliable cash flows over the years. This also benefits from long-term contracts with clients, and is an important and hard-to-replicate advantage. However, it’s essential to note that those relationships are vulnerable to changes in management or internal client needs.

These moats, however, are narrow and vulnerable: These advantages are not broad enough to create pricing power, or to deter competition long-term, nor are they as defensible against technological disruptions. It is important to continuously analyze to see if their moat is changing over time.

Risks to the Moat and Business Resilience:

Technological Disruption: Both the HVAC and detection and measurement segments face the risk of technological obsolescence. In a rapidly evolving world of tech and innovation, current products can be replaced with better ones by competitors.
Competition: SPX operates in competitive industries, and many of its product segments are subject to significant price competition. Competitors can and often do enter the industry with less expensive products. It’s very hard to gain significant pricing power in those segments.
Cyclicality: Being exposed to the construction, manufacturing, energy, and infrastructure sectors exposes them to cyclicality in these industries. This means that the company’s financial performance fluctuates with economic conditions, making it vulnerable in recessionary periods.
Supply Chain and Input Costs: In the current global scenario, supply chain disruptions could impact the company’s margins, as well as its production capacity. Furthermore, rising input costs, especially for raw materials and energy, could pressure their profits.
Acquisition Integration Risks: SPX has pursued several acquisitions in the past. Successfully integrating acquired companies can be difficult. Potential negative effects include failing to gain the anticipated cost synergies and the distraction of management to integrate the newly acquired companies can impair the growth of the main business.
Dependence on Specific Sectors: A significant portion of SPX’s revenue relies on specific sectors, such as industrial manufacturing and energy. Any slowdown in these industries will affect the company’s financials and may be a big blow.

Business Overview:

SPX Technologies operates through two main segments:

HVAC: This segment designs, manufactures, and markets a wide range of HVAC solutions, including boilers, chillers, cooling towers, and other thermal management equipment. This segment is highly fragmented, especially when it comes to manufacturers of residential systems. This industry is mature, and the company should compete on cost or value.
Detection and Measurement: This segment provides highly precise test and measurement instruments. The company’s products are used by clients in a wide variety of sectors, such as food, energy, oil and gas, and industrial processing. This segment is also subject to technological obsolescence, and requires constant innovation to remain competitive.

Revenue by geographic market: SPX’s revenue is diversified globally, with North America being its largest market, followed by Europe, Africa, and Asia. The company has significant exposure in the USA, Canada, The UK, and several Latin American and European countries.

Latest News: In the Q3 2024 report, management mentioned that demand in North America, including the US, continues to be robust, specifically in the HVAC segment. There have also been improvements in the European region. The company is also seeing a surge in investment related to energy transition. The backlog remains strong, and the company is continuing to prioritize projects that can provide the best return. The company continues to be exposed to volatility in raw materials, but they are trying to reduce the impact by supply chain efficiencies and price increases. However, the company continues to see labor shortages and cost increases. They also intend to use pricing power to reduce the impact of cost increases. Overall, the company believes it can achieve its updated full-year guidance for 2024.

Financial Overview: SPX Technologies’ financial performance, as evidenced by recent earnings calls and reports, reveals a complex landscape with periods of solid growth mixed with challenges in specific areas:

Revenue Growth: SPX has demonstrated steady but unspectacular growth in revenues, mainly in its HVAC segment. There are some positive trends, but mostly it is in line with macroeconomic growth. This is seen in the latest earnings report where management pointed out revenue growth is driven by a favorable demand environment and some increases in prices.
Profitability and Margins: Net profit margins have been volatile, fluctuating with the mix of different projects and segments of the company. EBITDA margins are quite robust though, showing that they are able to translate revenue to earnings. The company is focusing on pricing actions and cost reductions to boost margins. For example, they are working to reduce their reliance on outside third party contracts.
Operating performance: Operating performance has been mixed, with significant improvements in some divisions while others suffer. In the last earnings report, the performance of their detection and measurement segment was strong in certain geographic locations, and there is still work to do in others, like the communications business. This points out the importance of constantly monitoring all segments of the company’s business.
Capital Structure: SPX Technologies has a moderate debt burden, which they seem to be intent on reducing in order to boost future equity returns and free up funds for investment.
Free Cash Flow: The company has been quite efficient in generating free cash flow, with high amounts of conversions from net profit.

Despite these measures, the company’s financial reports have revealed a significant level of goodwill, as a result of numerous acquisitions the company has undertaken during its history. This goodwill represents an intangible assets that is not easily convertible to cash, and may be an overvaluation of assets. Furthermore, amortization of intangibles is affecting profitability and also has to be carefully tracked, as those can be non recurring costs that affect future free cash flow.

Long-Term Investments: A significant amount of cash is allocated to “long-term investments,” which require a detailed investigation as to the kind and nature of those assets, which are not always clear.

Understandability Rating:

SPX Technologies receives a 3 / 5 for understandability.

The company has several different business lines, each with different dynamics, and it may be hard to fully understand them all.
The financial statements require a careful examination to understand the differences between segments of the business and their performance.
Although the company is diversified, it is heavily dependent on the overall economic condition of certain industries, making it important for a prospective investor to familiarize themselves with them.
The large amount of acquisitions also make it more difficult for the everyday investor to understand the company’s current situation and its future outlook.

Balance Sheet Health Rating:

SPX Technologies receives a 4 / 5 for balance sheet health.

While the company is moderately leveraged, there is room for reducing the amount of debt in order to increase its robustness.
Good cash flows ensure that the company is in a good position to repay its liabilities.
The level of goodwill that is recorded needs to be continuously checked for future impairment.
The company is consistently focusing on reducing debt and improving operational efficiency, which is a good sign.
They also hold a significant amount of nonoperating assets, which have to be properly analyzed before a full assessment of balance sheet health can be done.

Conclusion

SPX Technologies has some solid attributes, especially in areas like the HVAC and niche market detection and measurement. However, the lack of a wide economic moat, alongside some potential issues in its long-term financial results, prevents it from being deemed a high-quality investment with high probability of success. A successful investor will need to deeply analyze specific segments and how those fare in their individual respective markets, as well as understand the underlying financial characteristics of the business to make an informed investment decision.