Spirax runs out of steam

It’s now more than two years since Spirax’s (SPX) stellar stock market run ended, after a 10-year period in which its shares recorded a nine-fold increase in value.

The thermal energy specialist can point to several reasons for the loss of momentum, much of which is linked to market forces. Global industrial production growth slowed to 0.3 per cent last year, from 2.1 per cent a year earlier. The frustrating thing for Spirax is that some of its most profitable markets were among the hardest hit. Biopharmacy, which made up 16 per cent of prior year sales, suffered a post-pandemic lull, with customers winding down excess stocks. The same was true in the semiconductor industry.

Although the company took action to “right-size capacity and overhead support costs”, operating profit fell by 11 per cent. The group’s return on invested capital slipped by nearly 5 percentage points to 13.5 per cent. 

Despite remaining cautious about the outlook for global industrial markets this year, Spirax expects “mid- to high-single-digit” growth in organic revenue and double-digit growth in its adjusted operating profit as both the biopharm and semiconductor markets recover. It remains even more bullish about regaining past glories in the medium term.

If it does, then its current share price of 29-times forecast earnings might look like a bargain compared with its five-year average of 33-times. But such a valuation leaves little room for error and as Shore Capital analysts point out, earnings per share have grown at a fairly pedestrian rate of just 4 per cent over the past five years. We stick to hold.

Last IC view: Hold, 10,208p, 10 Aug 2023