Capital spending recovery to boost Spectris

Spectris' shares may have risen by over 40 per cent since August's half-year results, but there's every chance that the rerating at at this well-managed industrial electronics specialist has further to run. The next boost should come when the group publishes an expected bullish pre-close statement - due on the day Investors Chronicle hits the news stands.

Manufacturers have so far been reluctant to invest in the kind of high-technology production-line upgrades in which Spectris specialises. Indeed, while the UK purchasing managers' index hit a 16-year high in December, Markit - the research firm behind the data - found that demand for UK-made capital goods remained "subdued". That makes sense - unlike basic components, where demand is booming, capital goods are big-ticket items that companies will only order once they're sure of their prospects. But, crucially, such upgrades can't be delayed permanently. The same goes for research and development spending, another important driver for Spectris - though that expected boost could suffer should the wider global economic recovery stumble during 2011.

The group started to rebound in 2009's final quarter, but its published year-on-year sales growth has so far been fairly modest by engineering sector standards - just 9 per cent in the first half of 2010. Margins also remain in the low double-digits. Yet, judging by its November trading update, which led analysts to issue steep forecast upgrades, growth has since started to strengthen.

In fact, the once-laggard test and measurement division, which supplies equipment to product development departments in the auto and aerospace industries, saw sales rise 20 per cent in the four months to 31 October. That should continue as capital spending thaws more generally. The impact on profits will also be magnified by Spectris' steep operational gearing - essentially, volume increases will largely drop straight through to earnings.

Most of the analytical instruments sold by Spectris improve the speed or quality of industrial production in some way. It's a broad area, and Spectris is little more than a conglomerate-style holding company for 13 separate companies serving a diverse range of industries with an even more diverse product range. Indeed, Spectris is continually expanding that range through its research and development department - which cost about 8 per cent of sales in the first half - and bolt-on acquisitions.

That does make Spectris a less than simple company to understand. But such diversity also leaves it looking fairly well protected against pressures within individual industries. For example, its academic research business (9 per cent of sales) will find the going tough as publicly-funded research facilities suffer budget cuts - at least in developed markets. But that should be offset when the mining industry (12 per cent of sales) starts investing again after its late-cycle hiatus last year.

The group is equally well-diversified geographically, thanks to its nimble acquisition strategy over the past five years. Its single largest client country is the US - still the leader in industrial efficiency - which generates 22 per cent of sales. The next largest is China, which overtook Germany last year with 12 per cent of sales. That share should now be even higher, as the company bought a Chinese company in July; just one of three acquisitions it made in the second half.