We think recent macroeconomic events are likely to punish Spirax-Sarco (SPX), whose multi-national engineering business is sensitive to weak industrial spending and low energy prices. The steam trap and pump maker is renowned for growing earnings and dividends, most recently by implementing cost-cutting measures and diversifying into emerging regions. However, with its lucrative developing markets slowing and the price of oil hitting a four-year low, the shares, which trade at a hefty premium to the sector, look too pricey.
- Enviable track record
- No net debt
- Weak macroeconomic backdrop
- Demand could be hit by falling oil price
- High currency
- Shares trade on a premium to peers
A key problem for Spirax is that low energy prices essentially reduces demand from users of steam power, which is not good considering that steam generates 80 per cent of group profits. Roughly 85 per cent of revenues for the steam business come from the replacement market and 15 per cent from larger projects such as plant expansions or greenfield developments. In terms of the replacement market, maintenance tends to be deferred when the price of oil is low, as it reducing the potential savings from steam-powered projects which impacts investment decisions.