Rotork shares too expensive

But things are changing. Whereas back in 2008 the oil price bounced back fairly quickly from a low of $30.28 (£21.20) a barrel, this time it's been in the doldrums for considerably more time. As 57 per cent of Rotork's revenues are generated from oil companies, who've been cutting back on investment as the commodity plummets in value, the group's past performance seems to matter less to the market by the day.

When the oil price started falling towards the end of 2014, management was confident that the group's midstream and downstream operations would be insulated. Fast-forward a year and persistent weakness has now spread to these areas of the business, forcing the company to post a rare profit warning in September.

Industry-wide project deferrals and cancellations prompted management to reduce operating profit guidance by 12 per cent. The company then updated markets again in November, warning that third-quarter revenue and order intake had slumped 18 per cent and 17 per cent, respectively. But rather than downgrade guidance once more, it opted to reiterate previous targets. But these targets look increasingly optimistic. The oil price faces a number of pressures in 2016, owing to more US and Russian oil reaching the market, sanctions being lifted against Iran and Opec refusing to limit production. Should the oil price remain lower for longer, we think fresh sellers of Rotork shares will emerge.

Growing pricing pressures mean broker Numis expects its operating margins to fall 4.1 percentage points to 22.3 per cent when it reports results for the year to December 2015 in March, followed by a drop to 20.5 per cent this year - putting an end to years of rising return on sales.

Should the bad news continue to pile up, as we can see it doing, the shares' premium rating is likely to come under pressure and the shares' hefty forward PE ratio could start to move closer to the rating of international peers such as Emerson Electric (US:EMR), Flowserve (US:FLS) and Pentair (US:PNR) - at present it trades at a 31 per cent premium to the average rating for the trio.

Higher than usual debt levels could also feed into investor fears. Following some fairly big and questionably timed acquisitions of oil and gas peers in recent months, the group has confirmed it's now sitting on net debt of about £86m. Three deals have been struck since Rotork started to really feel the squeeze of capex cuts in August, the biggest of which was the £125m spent on oil and gas valves and components manufacturer Bifold. Some may argue that splashing out on new businesses at this stage of the oil capex downturn is a recipe for disaster.

Other pressures include a strong pound, weak emerging market currencies and uncertainty in important regions. In Russia, Vladimir Putin's government has responded to European Union sanctions by refusing to import goods such as actuators. And projects in China have reportedly come under pressure from a crackdown on corrupt local officials.