Spirax Group (SPX)
Spirax Group (formerly known as Spirax-Sarco Engineering) was first listed on the London Stock Exchange in 1959, but we must go all the way back to 1888 in order to understand the roots of this iconic British company. With a history of 136 years, Spirax Group (SPX) began as a small company dedicated to the import and export of steam traps, which are automatic valves that filter condensate and air without allowing steam to escape. They were first applied in factories where steam was used for heating or as a driving force for mechanical power. Steam traps ensured that energy was not wasted, which remains the company's main mission today.
SPX has become a global leader after an international expansion that was as aggressive as it was successful. The company now has 37 manufacturing plants and 10,000 employees, supplies more than 1,700 different core product lines and serves more than 110,000 customers in 164 countries. While steam systems are not exactly exciting, they are a fundamental part of any manufacturing process where heat transfer is required. Any food or beverage facility, regardless of location, requires a steam system to operate. Since SPX developed its first steam trap, there have been world wars, economic crises, and many industrial and technological advances, but after a few redesigns, that same automatic valve is still just as relevant today.
It is easier for a company to survive when it provides critical products that are difficult to replace or disrupt by new technologies. However, SPX has been increasing earnings per share at a 9% CAGR for almost 40 years largely due to its corporate culture and long-term vision. Since 1930, SPX has been committed to a direct sales strategy – the company’s engineers provide advice to customers throughout the whole purchasing process. Today, SPX has the largest staff of engineers and sales technicians in the industry, one of the company's competitive advantages. However, what I find most interesting about the business is the many hidden strengths that are not immediately obvious and are worth analyzing in detail. How else could SPX have sustained pricing power above inflation, operating margins well above the industry average and a return on invested capital of more than 40%?
Despite having more than a century of history, the industry where SPX operates should benefit from several secular trends. However, the market is not happy that some subsidiaries have slowed down their organic growth recently. In today's post I am taking a closer look at this iconic business, its strengths and ambitions, as well as the tailwinds that are carrying the industry, and I am also sharing my opinion on whether or not the stock’s biggest drop in recent history can pose a good investment opportunity.