Third Avenue Management Comments on SPX Flow

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Dec 10, 2015

SPX Flow (NASDAQ:FLOW) is a global supplier of flow control equipment including pumps, valves, mixers, filters, air dryers, separators and heat exchangers serving the food and beverage, power and energy and industrial markets. The company was spun out of SPX Corporation in September. The original SPX Corporation management team moved over to SPX Flow where they are continuing to execute on their multi-year restructuring efforts.

Post spin, management has already increased its segment operating margin targets, and announced plans to expand low cost manufacturing in Poland while shifting production from two higher cost European manufacturing facilities. Management is also focused on improving their material sourcing, streamlining the back office operations and reducing expenses.

From its post-spin levels of just under 3x debt to EBITDA, SPXFlow’s products should benefit from secular long-term growth in the dairy industry as developing nations increase their consumption. Although SPX Flow is facing a cyclical downturn in upstream oil and gas activity, this activity accounts for only 14% of total company revenue. The remaining power and energy businesses should benefit from increased demand from the midstream and power sectors. The industrial segment which primarily serves chemical and air processing industries should remain fairly stable.

We expect the company will generate around $100 million of free cash flow a year representing an 8% free cash flow yield which management will likely use to repay debt—the company’s leverage ratio is just over 2x—and eventually make acquisitions in the highly fragmented pump and valve industry. We also believe that SPX Flow could be an attractive acquisition target for a larger flow control peer, providing another aspect of our downside protection for the shares. At our purchase cost, we see roughly 40% upside to our mid-case NAV.

From Third Avenue Management (Trades, Portfolio)'s Small-Cap Value Fund fourth quarter 2015 portfolio manager commentary.