SPW FLOW Started At Underperform By RBC

• SPX Flow Inc FLOW was spun-off from SPX Corporation, with the distribution of common stock being completed on September 26, 2015.
• RBC Capital Markets analyst Deane Dray initiated coverage of the company with an Underperform rating and a price target of $32.
• SPX Flow could face severe operating challenges in the near term due to the ongoing turmoil in oil markets, possibly overshadowing the Food & Beverage performance, Dray believes.

Analyst Deane Dray said that SPX Flow has 28 percent direct exposure to oil & gas, which is the third highest among “the oil-exposed names we cover.” Energy capex and opex may be restricted, at least through 1H16, due to the possibility of oil prices staying “lower for longer.”

This headwind could overshadow “the jewel in the portfolio, Food & Beverage, with its steady defensive growth profile,” Dray added. He also expressed concern regarding the 30 percent emerging market exposure, which is significantly higher than the sector average, posing a higher-than-anticipated risk. The concerns stem from the China slowdown, and associated currency headwinds.

The Industrial segment, which accounts for 30 percent of SPX Flow’s sales, may also face challenges due to the ongoing global capping of capex. “Lastly, there is an element of new-company risk that all spinouts face, with the dual challenges of optimizing cost structures while hitting near-term operating goals,” Dray wrote.

RBC Capital Markets estimates a 6.6 percent decline in organic revenue in 2015, with 170 bps of EBIT margin contraction to 12.4 percent. With weakness in Power & Energy likely to continue well into 2016, a 22.4 percent organic decline is expected in 2015.

The Industrial segment’s organic sales in 2015 is expected to decline 1.8 percent, while Food & Beverage is likely to generate 5 percent growth, the report stated.