SPX: The Hidden Shale Oil Play

To no one's surprise, shale oil production has absolutely exploded. Industry experts have long discussed this opportunity, but it seems even they didn't recognize just how big this whole shale oil thing would be. And that underestimation has led to a problem: Transporting all of that oil requires custom pumps and valves for the new pipelines. Since a jaunt down to the local plumbing supply store won't do, companies like SPX (NYSE: SPW  ) are poised to benefit big-time.

Who are these guys?
SPX may be familiar to the shale oil crowd. But if you're relatively new to the game, the specialists at SPX have probably been flying under your radar. Here's what you need to know: With a $3 billion market cap, SPX isn't the biggest, but it's one of the best (more on that to follow).

SPX has operations around the world and sells its engineering solutions, which are often customized, in more than 150 countries. There are four primary business lines, including the unit pertaining to shale oil. "flow technology." The others are "test and measurement," thermal equipment and services, and industrial products and services.

The flow technology unit includes a company called M&J Valve. Here's where it gets good: According to the folks in the know (operators of the pipelines), M&J is one of the leading custom valve makers in the pipeline industry. Without valves, there are no pipelines, and that's where things really start to get interesting.

Too much of a good thing
The gurus at the Interstate Natural Gas Association of America already knew the shale oil boom required a huge increase in pipeline construction. In fact, last year the INGAA suggested more than $31 billion in new pipelines would be needed by 2035 to handle the load. Now fast-forward to today. Updated estimates place the need for new oil pipeline spending at $10 billion for 2012 and another $10 billion in 2013. We're in the midst of the biggest liquid pipeline production boom in more than 60 years -- and that's a lot of pipe.

Though no delays in transporting shale oil have occurred yet, the companies running the bigger oil-producing projects -- those cranking out 1 million or more barrels a day -- are beginning to wonder whether there are enough custom-valve manufacturers to meet demand. And with that, let's return to our regularly scheduled program.

SPX's earnings are already strong
The fear prior to SPX's Aug. 1 earnings announcement was that a solid quarter would wake too many investors up to the opportunity it represents. The good news is that SPX grew in several key financial areas. But the great news is that the expected bump in share price hasn't materialized, meaning SPX remains a solid growth opportunity.

Quarter-to-quarter comparisons require several additions and subtractions of one-time charges and events, but even after all the math is done, SPX performed just fine. Revenue increased more than 3% based on organic growth. With recent acquisitions factored in, revenue grew 10.9%. Accounting for charges in both this year's second quarter and the prior-year Q2, per-share earnings rose from 2011's $0.76 per share to $0.78 per share.

Free cash flow was also relatively solid, and 23% growth in Asia was more than enough to offset the 5% revenue decline in SPX's European operations. All in all, that's not bad. So what's with the negative sentiment that has the stock down more than 2%? Taking Europe into account, Chairman and CEO Chris Kearney now expects 2012 revenue to grow between 11% and 15%, rather than the previously stated range of 13% to 19%.

Comparing a couple of players
By several traditional measures, SPX isn't the cheapest engineering manufacturer on the block. Competitors Flowserve (NYSE: FLS  ) , Dover (NYSE: DOV  ) , and IDEX (NYSE: IEX  ) are all cheaper based on trailing price-to-earnings ratios. SPX's 1.65% dividend yield is also lower than all but Flowserve's yield of 1.2%. So what makes SPX such a sound investment?

First, looking ahead puts things into perspective. SPX's forward P/E of 10.2 is nearly identical to that of Dover and lower than those of Flowserve and IDEX. Assimilating acquisitions and ridding the books of all those one-time charges will put SPX back on a level playing field.

However, what really sets SPX apart is that, by the oil and gas industry's admission, SPX's flow technology business unit is one of few that have the capacity to meet pending demand for custom oil pipeline valves and pumps. The market is coming, and SPX can meet its needs. Investors should love the sound of that.

A rebound in industrial company stocks is a sound play, particularly for mid- and long-term investors. For more investing ideas similar to SPX, take a look at our special free report: "3 Stocks That Will Help You Retire Rich."

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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