Are Spirax-Sarco Engineering shares cheap as FTSE firm forecasts FY24 growth?

Spirax-Sarco Engineering shares pushed upwards on Thursday 16 November as the company said it expects performance to improve next year.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

2024 year number handwritten on a sandy beach at sunrise

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Spirax-Sarco Engineering (LSE:SPX) shares aren’t high on most retail investors’ wishlists. And I think that’s probably because it doesn’t get the attention it deserves. So, let’s take a closer look at this FTSE 100 engineering firm.

What it does

Spirax-Sarco Engineering is a global leader in the design and production of steam systems, industrial fluid control, and thermal energy management solutions.

The company specialises in providing engineering expertise and products that optimise the efficient and safe use of steam and other industrial fluids across various industries.

By enhancing energy efficiency, reducing emissions, and ensuring process reliability, Spirax-Sarco plays a pivotal role in helping industries meet sustainability goals while maintaining operational excellence.

It’s well-positioned to benefit from the green revolution and increasing emphasis on sustainability.

Trading update

In a trading update on Thursday (16 November), Spirax-Sarco Engineering reported a slowdown in sales growth due to a subdued trading environment. This led to lower revenue in the first 10 months of 2023 compared to the same period in 2022.

The company cited currency effects and a weaker macro-economic environment affecting its three business divisions.

Organic sales growth in Steam Specialities fell below the impressive 15% achieved in the first half of 2023. Meanwhile, Electric Thermal Solutions experienced continued strong demand.

Spirax-Sarco anticipates a 1.5% adverse impact on full-year sales and profit due to current exchange rates but expects a return to revenue growth in 2024, remaining confident in its growth prospects.

The Cheltenham firm expects full-year sales to be between 1% and 2% lower than the £1.73bn delivered in 2022.

Valuation

Currently, Spirax-Sarco is trading at 29 times 2022 earnings. That’s not overly cheap. In fact, it’s a considerable premium versus the FTSE 100 average of 14 times. However, companies with strong growth trajectory often trade at a premium to the index.

Looking forward, we can see that the consensus forecast is for earnings per share to improve throughout the medium term. In the below chart, I’ve used earnings per share forecasts to provide me with price-to-earnings ratios for the coming years.

202320242025
EPS (p)282342380
P/E31.726.123.6

The above data shows that EPS isn’t going to be as strong this financial year as it was last year and this leads to a more elevated forward P/E ratio.

However, the P/E ratios falls through to 2025 with the company’s EPS expected to increase by more than 10% annually across the forecasting period.

Given the downturn in profitability in 2023, Spirax-Sarco has a PEG ratio of 3.2, which isn’t overly attractive. The PEG ratio provides investors with a more nuanced perspective on a stock’s valuation by considering both its P/E ratio and its expected earnings growth rate. A PEG ratio below one normally suggests a company is undervalued.

Nonetheless, if we discount 2023 as a hiccup given the financial climate, and assume the company’s EPS growth is extended beyond 2025, it could be a highly attractive investment opportunity.

It’s not a stock I’m adding to my portfolio now, but I’m keeping a close eye on it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »