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.
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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.
| 2023 | 2024 | 2025 | |
| EPS (p) | 282 | 342 | 380 |
| P/E | 31.7 | 26.1 | 23.6 |
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.
