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WIKI ANALYSIS
SPX (NYSE: SPW) manufactures industrial-grade power infrastructure products and specialty diagnostic tools. Its products range from pumps and valves to power transformers and specialty automobile diagnostic tools. SPX targets two end markets in particular: the energy industry (33% of 2007 revenue) and the automotive industry (19.7% of 2007 revenue).[1]
With aging energy infrastructure in the United States, combined with new legislation requiring higher efficiency for energy transmission, electric companies are projected to invest $28 billion in transmission by 2010.[2] SPX's products are used in all aspects of the energy production process -- pumps and pipes for transferring fuel and byproducts, thermal products for regulating temperatures during electricity generation, and power transformers for transmission and distribution.[3] At the same time, SPX earned 81% of its 2007 diagnostic tools revenue from vehicle manufacturers, dealerships, and repair facilities.[4] Since this business is concentrated primarily in North America, its growth fluctuates with changes in the American automobile industry,[5] where new car sales declined 10% year-over-year in the first half of 2008.[6]
Business Overview
Segments
- Flow Technology (23.3% of 2007 revenue) makes products used to transfer fluids and heat during industrial processes. Significant items include pumps, valves, filters, and heat exchangers. Critical end-markets include sanitary manufacturing industries (41% of 2007 segment revenue) and energy facilities (25% of 2007 segment revenue).[8] Sanitary industries include food, beverage, and health care product manufacturers.
- Test and Measurement (24.3% of 2007 revenue) manufactures specialty diagnostic tools, 81% of which ended up with vehicle manufacturers and repair facilities in 2007.[9]
- Thermal Equipment and Services (32.4% of 2007 revenue) creates cooling and heating products for industrial, commercial, or residential settings. The largest end market remains energy facilities (61% of 2007 segment revenue), followed by general heating, ventilation, and cooling systems (31% of 2007 segment revenue).[10]
- Industrial Products and Services (20% of 2007 revenue) makes products ranging from hydraulic units to broadcast antennas, though medium- to large-grade Waukesha power transformers accounted for 44% of segment revenue in 2007. [11]
Geographic Distribution
Since 2004, SPX has attempted to decrease its reliance on North American markets. Including revenue from recent acquisitions, 51% of 2007 revenue came from outside North America, up from to 30% in 2004.[13] However, Test and Measurement (59% of 2007 revenue from North America) and Industrial Products and Services (81% of 2007 revenue from North America) are still primarily based in North American markets.
| Annual income data, in millions[14] | 2005 | 2006 | 2007 | |
|---|---|---|---|---|
| Total Revenue | $3,730 | $4,168 | $4,822 | |
| Cost of Goods Sold | $2,702 | $2,998 | $3,429 | |
| Other Operating Expenses | $764 | $849 | $968 | |
| Operating Income | $264 | $321 | $426 | |
| Net Income | $1,090 | $171 | $294 | |
Trends and Forces
Declining domestic automobile sales have hurt sales of vehicle diagnostic tools.
In the first half of 2008, domestic new car sales fell 10.1% year-over-year,[16] leading to a 3% organic decline in sales of SPX's vehicle diagnostic products.[17] These diagnostic tools (sold through the Test and Measurement division) brought in 19.7% of total company revenue in 2007.[18] With 59% of this segment's 2007 revenue generated in North America,[19] its performance depends heavily on conditions in the United States automobile market.[20]
SPX benefits from rising global energy demand, with 33% of 2007 revenue coming from the energy industry
World Energy Outlook estimates that $22 trillion will be spent on global energy infrastructure development by 2030,[21] 63% of which will occur in developing countries.[22] SPX is positioned to benefit from this anticipated demand increase, with 51% of the 2007 revenue coming from outside North America.[23] Also, SPX's products -- such as pumps, filters, thermal transfer equipment, and transformers -- are used in all levels of power generation and transmission. Finally, SPX's products can be integrated into any form of energy infrastructure, regardless of fuel source.[24]
Aging U.S. energy infrastructure and stricter reliability standards driving heavy transmission investment
An Edison Electric Institute study stated that electric companies plan to invest over $28 billion in transmission by 2010.[26] The failure rate for an electricity transformer rises sharply 30 years after installation, and the United States' last major investment in transformers occurred in the 1970s, peaking at 185 giga-voltage amperes installed in 1974.[27] As a result, power companies throughout the United States are beginning to replace aging transformer units, which benefits SPX's Waukesha Electric division (8.8% of 2007 revenue).[28] Moreover, the Energy Policy Act of 2005 now mandates the strict enforcement of electricity reliability standards.[29] The threat of severe penalties (up to $1 million per day) for ineffective transmission has prompted power distributors to invest in all aspects of their energy grids, including outdated transformers.[30]
Competition
Flow Technology[31]
- Emerson Electric Company (EMR) makes industrial-grade pumps, valves, pipes, and gauges.[32] Emerson's Process Management segment earned 61% of its 2007 revenue from outside North America,[33] while SPX's Flow Technology earned 67% of its revenue from the same markets.[34]
- Alfa Laval (OMX: ALFA), a Swedish corporation, held the top market position in the sanitary fluid handing business, accounting for 10-12% of global market share in 2007.[35]
- GEA Group (FWB: G1AG), based in Germany, makes valves and pumps for liquid transfer. Only 19% of GEA's 2007 revenue came from North America.[36]
Test and Measurement
- Snap-On (SNA) makes diagnostic tools for vehicle service and repair, with 57% of 2007 revenue coming from the United States.[37] Like SPX, Snap-On targets franchised dealers, original equipment manufacturers, and independent repair shops.
Thermal Equipment and Services
- GEA Group (FWB: G1AG) makes wet and dry cooling systems for power plants and industrial facilities through its Thermal Engineering segment. GEA also offers indoor heating, ventilation, and air conditioning products.
- Emerson Electric Company (EMR) sells HVAC and commercial refrigeration products through its Climate Technologies segment.[38]
Industrial Products and Services
- ABB (ABB) makes electricity transformers, competing with SPX's Waukesha Electric products. In July 2008, ABB announced plans to acquire Kuhlman Electric Corporation to enlarge its existing North American power transformer business.[39]
References
- ↑ SPX Annual Guidance Meeting 2008 page 13
- ↑ EEI "Actual and Planned Transmission Investment" 2007
- ↑ Citigroup Energy 2020 Conference, 6/11/2008, page 17-21
- ↑ SPX Annual Guidance Meeting 2008 page 74
- ↑ SPX Annual Guidance Meeting 2008 page 74
- ↑ WSJ Market Data Center, Auto Sales, 7/1/2008
- ↑ SPW 2007 10-K page 64
- ↑ SPX Annual Guidance Meeting 2008 page 70
- ↑ SPX Annual Guidance Meeting 2008 page 74
- ↑ SPX Annual Guidance Meeting 2008 page 72
- ↑ SPW 2007 10-K page 3
- ↑ SPW 2007 10-K page 65
- ↑ Citigroup Energy 2020 Conference, 6/11/2008, page 8
- ↑ SPW 2007 10-K page 45
- ↑ Citigroup Energy 2020 Conference, 6/11/2008, page 10
- ↑ WSJ Market Data Center, Auto Sales, 7/1/2008
- ↑ SPW 2008 Q2 10-Q page 31
- ↑ SPW 2007 10-K page 64
- ↑ SPX Annual Guidance Meeting 2008 page 74
- ↑ SPW 2007 10-K page 12
- ↑ WEO 2007 Global Energy Demand Fact Sheet
- ↑ Lehman Brothers Industrial Select Conference, 2/13/2008, page 15
- ↑ Citigroup Energy 2020 Conference, 6/11/2008, page 8
- ↑ Citigroup Energy 2020 Conference, 6/11/2008
- ↑ EEI "Actual and Planned Transmission Investment" 2007
- ↑ EEI "Actual and Planned Transmission Investment" 2007
- ↑ SPX Annual Guidance Meeting 2008 pages 35-37, Source: Hartford Steam Boiler
- ↑ SPW 2007 10-K page 64
- ↑ Hunton & Williams Client Advisory, "Energy Policy Act of 2005 Gives Teeth to Electric Reliability Rules," August 2005
- ↑ Citigroup Energy 2020 Conference, 6/11/2008, page 31
- ↑ SPW 2007 10-K page 2-3
- ↑ Emerson Investor Relations, "Process Management Business Segment"
- ↑ Emerson, "Process Management Investor Update," 2/8/2008 page 6
- ↑ Citigroup Energy 2020 Conference, 6/11/2008, page 39
- ↑ Alfa Laval, "Annual Report 2007", page 22
- ↑ GEA Company Presentation, July 2008
- ↑ SPA 2007 10-K page 89
- ↑ Emerson Investor Relations, "Climate Technologies Business Segment"
- ↑ ABB Press Release 7/16/2008
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