Morgan Stanley Thinks SPX Flow Is Cheap Compared To Peers, Initiates At Equal-Weight

Following Morgan Stanley's initiation of coverage of SPX Flow, analyst Nigel Coe explained, “Small cap, levered plays with downside risk to consensus estimates and no viable balance sheet catalysts have not been market favorites for sometime and we see little reason why that changes anytime soon.”

Consolidation Ahead

However, Coe expects the Flow Control industry to consolidate over time, once there is greater end-market stability, with 2016 expected to bring in some improvement in the end-market fundamentals.

The declines in the power and energy segment are expected to slow, while the industrial segment is expected to recover to some extent, although only in 2H2016.

Related Link: SPX Flow Announces Multi-Year Plan To Expand Manufacturing Presence

“However, backlog erosion in food and beverage on account of weak dairy prices and recent capacity overbuild represents a new challenge and leads us to project ~2.5 percent core sales erosion vs. -6.3 percent in 2015e,” Coe stated.

Future Fundamentals

SPX Flow’s top-line fundamentals are expected to lag its EE/MI peers by about 300 bps in 2016, although Coe expressed optimism regarding margin fundamentals driven by the robust execution over the past three years, along with the aggressive restructuring initiatives.

“We also see some mix benefits in both the food and beverage and power and energy segments as demand continues to shift to richer component and aftermarket products, although all of these favorable factors are likely offset by price deflation in P&E,” Coe added.