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.
The price of crude oil also represents a useful guage for global economic activity. Weak macro data is bad for cyclical companies like Spirax and over the past 20 years the group's organic growth has closely mirrored world GDP growth. The fact that the International Monetary Fund has cut its global growth forecasts by 10 basis points for this year to 3.3 per cent and 20 basis points for next year to 3.8 per cent is therefore of concern.
In previous years, Spirax sought to offset sluggish growth in its developed markets by investing in rapidly expanding regions like Asia-Pacific and Latin America. And while those markets are still growing far quicker than the US, UK and Europe, recent data indicates that emerging economies are now, too, entering an era of slower growth. Of particular note here is China, which accounts for about a tenth of sales and is the largest contributor.
Spirax's massive global presence also means it faces more currency risk than most of its peers. In fact, while many industrial engineers will be relieved now that the pound weakened against the US dollar, Spirax is still likely to be sweating over a host of other currency movements. So a weak euro and Brazilian real could present further unwelcome headaches.
Generally, the type of products it sells are rarely the first people order, which means it historically takes six to nine months to be impacted by macro events. From an growth perspective, following EPS growth of 14.2 per cent in 2013, broker Investec expects negative growth of -1.4 per cent for 2014 and 3.6 per cent in 2015. Given the concerns the strong outperformance of Spirax's shares over the past three months compared with other industrial engineers and the extent of its premium rating (see table) look questionable.
Spriax-Sarco vs industrial engineers
| Name | TIDM | Price | Fwd NTM PE | DY | 3-mth price change | 6-mth price change | 1-yr price change |
|---|---|---|---|---|---|---|---|
| Spirax-Sarco | LSE:SPX | 2,881p | 20.1 | 2.0% | 8.1% | -2.4% | -0.7% |
| GKN | LSE:GKN | 316p | - | 2.5% | -8.1% | -17% | -15% |
| Fenner | LSE:FENR | 312p | 13.1 | 3.6% | -8.4% | -25% | -20% |
| Morgan Advanced | LSE:MGAM | 284p | 12.5 | 3.7% | -9.3% | -15% | -5.1% |
| Vesuvius | LSE:VSVS | 423p | 12.5 | 3.6% | -9.4% | 0.1% | -13% |
| Bodycote | LSE:BOY | 616p | 13.8 | 2.2% | -10% | -17% | -6.2% |
| Weir | LSE:WEIR | 2,241p | 15.1 | 1.9% | -13% | -16% | -0.7% |
| IMI | LSE:IMI | 1,212p | 14.2 | 3.1% | -16% | -20% | -19% |
| Average (ex. Spirax) | - | - | 13.5 | 2.9% | -11% | -16% | -11% |
Source: Datastream/S&P CapitalIQ
| SPIRAX-SARCO (SPX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 2,834p | MARKET VALUE: | £2,145m | |
| TOUCH: | 2,834-2,835p | 12-MONTH HIGH: | 3,214p | LOW: 2,548p |
| FORWARD DIVIDEND YIELD: | 2.4% | FORWARD PE RATIO: | 21 | |
| NET ASSET VALUE: | 538p | NET DEBT: | £1.5m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 650 | 132 | 120 | 49 |
| 2012 | 662 | 124 | 112 | 53 |
| 2013 | 689 | 146 | 133 | 59 |
| 2014** | 672 | 142 | 131 | 64 |
| 2015** | 692 | 148 | 136 | 69 |
| % change | 3% | 4% | 4% | 8% |
Normal market size: 750 Matched bargain trading Beta:1.1 *Investec forecasts | ||||
