Course Project #2

FIN 515
Keller Graduate School

The company that I have investigated is SPX Corporation (SPX). It is an engineering

solutions company. The Companys products and solutions globally caters to power and energy
and processed foods and beverages sectors. The Companys key products include processing
systems and components for the food and beverage industry, pumps, valves and filtration
equipment used in oil and gas processing, power transformers used by utility companies, and
cooling systems for power generation plants and HVAC applications. It has three main divisions
The Flow Technology, Thermal Equipment and Industrial Products and Services selling medium
transformers (10 - 100 MVA) under the Waukesha brand name (Schwab, 2014).
I was drawn to this company first by accident. The Standard and Poors 500 Index is
reported under the symbol SPX (Bloomberg, 2014), in looking up that index one day I pulled
information on the SPX Corporation by accident. But what intrigued me was the volatility of
what I would have assumed to be a rather stable company. This company also is positioned to
take advantage of general increases in the economy overall by providing the hardware and
systems for major infrastructure projects. Being intrigued I have followed the company for the
past six months.
This company, like most, has been showing the steady improvement (see figure 1) as a
result of the strengthening economy as well as the release of pent up investment in the American
economy (Norman, 2012). In the past year it has shown extreme turbulence in its stock price as it
has been impacted by overall economic news about the economy. There have been some
surprises in earnings and there is certainly risk in this market segment. But overall the company
also has acceptable financial numbers and is rated from neutral to outperform by analysts. By no
means is it a diamond in the rough but it does appear to have solid potential and could ride a
wave of a resurging economy. Looking at its WACC may prove effective and worth the time.

Figure 1, Stock Price for SPX Corporation (Schwab, 2014)

Analysis using the Weighted Average Cost of Capital (WACC)

I determined its WACC for SPX Corp to be 10.21%. This is based on current financial
data as well as estimations of cost of equity. From the basic information on this company it
would not appear to be that exciting of an investment opportunity. The advantage of using
WACC is, as stated on, thatsWACC.com, A firm should use WACC as the discount rate when
calculating the Net Present Value (NPV) of any 'typical' project (thatsWACC, 2014). More
importantly this represents what you can expect to receive when investing in a company as
compared to where else you could put your funds (Value Based Management, 2014). So after
gathering the data on SPX Corp as shown in table 1, and using the formula WACC =
rD (1- Tc )*( D / V )+ rE *( E / V ), I arrived at the WACC of 10.21%. In a vacuum and
considering the safe markets of treasuries, demand deposits and other vehicles that does not
sound that bad. But considering the factors involved in the determination of this excellent metric
it is worth taking a closer look.

Table 1, Financial Data for SPX Corporation (Schwab, 2014)

Category

Value

Cost of Debt
Corporate Tax Rate
Total Debt
Total Equity
Total Firm Value
Cost of Equity
Other data on the company
CAPM Component
Beta:
Historical Market Return
Risk Free rate

6.69%
11.87%
$ 1,676,000,000.00
$ 2,158,000,000.00
$ 3,834,000,000.00
13.56%
Calculated Value:
1.32
11.00%
3.00%

But as a tool for analyzing investment opportunities I have taken this a step further I am
comparing to other companies in the same segment of the economy. This way I can see how SPX
compares to others in a marketplace that I believe is set to rapidly grow if the economy can get
fully back on track. The comparison companies I am using are Blount International (BLT),
Sunpower Corp (SPWR) and Curtiss-Wright Corp (CW). These three companies are in the same
basic industry as well as being similar in size or other characteristics compared to SPX Corp.
Table 2 shows how their WACCs compare to SPX.
One factor that comes through is the impact of the corporate tax rates. These companies
show a wide range of effective rates. From researching the companies it appears that they are all
experiencing extraordinary events that are impacting their rates, and thus having an impact on
the WACC calculations. In compiling this calculation I did defer to a three year average for the
tax rate (thatsWACC, 2014). Even with that moderate smoothing the impact still appears to be
significant.
Another consideration is the Debt to Equity ratios for the companies. SPX carries a hefty
77.66% where the others are 55% for BLT and 25-26% for SPWR and CW. This is of concern

from the standpoint that SPX may have concerns for being able to generate cash to repay debt
obligations. This puts it in an odd position since it operates in a moderately capital intensive
industry. This carries some negative stigma from investors and potential lenders should the
company need to use debt for future expansion or taking advantage of a swing in the
marketplace.
Table 2, Comparison WACCs
SPX
WACC
11.09%
Cost of Debt
Corporate
Tax Rate
Total Debt
Total Equity
Total Firm
Value
Cost of
Equity
Debt to
Equity

6.69%

BLT
13.73%
3.87%

SPWR
21.15%
12.54%

CW
13.21%
4.02%

11.87%

39.01%
-5.72%
30.25%
$1,676,000,000.0 $
$
$
0 477,372,500.00
867,482,500.00
920,076,500.00
$2,158,000,000.0 $
0 859,330,000.00
$ 3,400,000,000.00 $ 3,480,000,000.00
$3,834,000,000.0
0 $ 1,336,702,500.00 $ 4,267,482,500.00 $ 4,400,076,500.00
13.56%
77.66%

20.04%

23.16%

15.96%

55.55%

25.51%

26.44%

Summary
SPX as an investment appears to be a worthy consideration. The high debt to equity ratio
is more of a concern than the WACC but I never would have looked at it without calculating the
WACC. While not producing stellar results it does have a solid base line to start from. The results
of similar companies show that overall SPX is doing all right. If the economy would continue to
turnaround and more capital projects come on line then SPX may be worth looking at for a solid,
if not spectacular, return on your investment dollar.

References
Bloomberg. (2014, Dec 4). S&P 500 Index. Retrieved from Bloomberg.com:
http://www.bloomberg.com/quote/SPX:IND
Norman, D. (2012, Feb 14). Pent-Up Demand. Retrieved from MAPI:
https://www.mapi.net/pent-demand
Schwab. (2014, Dec 4). SPX Corporation. Retrieved from Charles Schwab & Co, Inc.:
https://client.schwab.com/secure/cc/research/stocks/stocks.html?
path=/research/Client/Stocks/Summary/QuoteDetails&symbol=SPW
thatsWACC. (2014, Dec 6). FAQ. Retrieved from ThatsWACC.com:
http://thatswacc.com/faccs.php
Value Based Management. (2014, Dec 4). WACC Investment Analaysis. Retrieved from Value
Based management Inc.: http://www.valuebasedmanagement.net/methods_wacc.html