Industrials with diversified operations, or more commonly known as multi-industry companies, have lately been grabbing a lot investors attention as many companies have been subject to activities like spin-offs, mergers and activism from major shareholders. The same theme echoed in presentations of these companies at Electrical Product Group (EPG) Conference.
Let’s have a look at some important companies in this industry that have been making the headlines:
A big deal?
Rockwell Automation (NYSE:ROK) reportedly signaled earlier this month (May) that it was warming to the idea of doing a sizable deal. CEO Keith Nosbusch was asked about this a day before the EPG Conference whether he was baited into making his bullish statement. Notably, he did not slam the door on the idea of future wheeling and dealing, although he did offer this caveat: “The only way we will make a large acquisition is if it makes financial and strategic sense.”
Hence, he left the door slightly ajar. Later, CFO Ted Crandall cracked it open a bit further by adding: “We would be willing to use the balance sheet if we thought that there was a larger acquisition that made sense.”
There are, of course, a couple of interesting options that could involve Rockwell Automation (NYSE:ROK). First, there has been talk it might be interested in making a move for all or parts of Invensys, a British engineering and information technology company. One advantage of doing something with Invensys is that it would allow Rockwell to put its overseas cash to use. Another Rockwell-related move that warrants a refresh involves Swiss engineering giant ABB. It was a year ago that ABB CEO Joe Hogan said he had no plans to bid on Rockwell Automation (NYSE:ROK), but Hogan surprised investors this month by saying he would step down once a successor was found.
For now, the street is keeping Rockwell Automation (NYSE:ROK) on the “suitor” list. Talking about valuations, the stock is only up 5% since the start of the year. The stock is trading at an average multiple of 14 times earnings. The Street expects the company to achieve double-digit growth in earnings per share (EPS) through 2013. The company also plans to go big in China where it believes that a huge opportunity still lies ahead.
Were all those talks just rumors about this company?
Honeywell International Inc. (NYSE:HON) Chairman David Cote and CFO Dave Anderson last fall were both caught on tape talking up Honeywell International Inc. (NYSE:HON)’s pipeline of acquisition prospects, but that bullishness was hard to spot at EPG as there was hardly any discussion of deal-making.
Is that because Honeywell International Inc. (NYSE:HON) is ready to cool off after doing a $600 million deal in December and announcing a $340 million deal last month? (Honeywell bought RAE Systems for $340 million in April. RAE Systems is a privately-held company that makes gas and radiation detection systems and software). Or is this just the calm before something bigger is announced? On that possibility, Cote said at EPG conference “we’re not going to lose our heads all of a sudden and do something silly.”
The stock is trading at an average multiple of 14 times earnings. Despite the stock being up 27% since the start of the year, investors are fond of the company given its leadership in attractive markets like commercial aerospace, process management (PM) and technology licensing for refineries and petrochemical plants. Moreover, there are several opportunities for Honeywell to achieve new margin peaks, even absent top-line growth. The company’s cost management initiatives coupled with the concept of organizational efficiency (OEF), are expected to bring margin expansion
Activism keeps this company busy
SPX Corporation (NYSE:SPW) has an activist in its midst who has, among other things, taken direct aim at the company’s compensation practices. Asked at EPG conference about pay and possible changes to better align pay with shareholder returns, CEO Chris Kearney said: “I think our approach on compensation has served us well over the years. We continue to tweak it and try and make sure that it is contemporary and competitive in the market. But fundamentally, our approach towards compensation hasn’t changed.”
This was an interesting line coming from a company that nearly lost a “say on pay” vote at its 2012 annual meeting and got just 67% support on a similar measure at the 2013 annual meeting this month.
The big question is where does SPX go from here? Overall, it has been a disappointing start to an important year. With activist shareholder involved, it seems that pressure will only increase on SPX to sell non-core assets quickly and subsequently increase its share buyback.
Management changes in the quarter (a new head of the Thermal unit, and a new head of the ClydeUnion unit) and increased restructuring in Thermal are positives but they might not be enough. The sale of the Thermal business is proving to be more difficult than expected, but a sale at almost any price will be taken positively. Those who have been following this company know that the thermal unit has seen its profits curtailed as the demand for cooling systems and heat exchangers have slowed down considerably.
The management focus in 2013 will be on internal operations and portfolio management as SPX commented no acquisitions will be done this year. Tangible catalysts like asset sales, pull forward of share buyback, and management changes are likely needed. Shareholder frustration is high on the name.
Final word
Both Rockwell Automation (NYSE:ROK) and Honeywell International Inc. (NYSE:HON) are well-managed companies with bright futures ahead in terms of M&A activity. However, SPX still needs to figure out how it will proceed to become a popular (not notorious) company among investors.
The article Mergers, Spinoffs and Activism Make This Industry an Interesting One originally appeared on Fool.com and is written by Zain Abbas.
Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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