Interactive Investor

Is this ‘best-in-class’ stock in buying territory?

A FTSE 100 stock with defensive appeal has been hammered amid short-term headwinds. City analysts, however, remain supportive.

10th August 2023 13:30

by Graeme Evans from interactive investor

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An opportunity to buy “best-in-class” Spirax-Sarco Engineering (LSE:SPX) was flagged in the City today after the highly regarded FTSE 100 stock was hit by heavy results-day selling.

The Cheltenham-based company, which generates more than half its sales from defensive-end markets such as food, healthcare and chemicals, fell 510p to 10,325p as it warned that de-stocking by biopharma customers will last into 2024.

JP Morgan Cazenove cut its price target from 11,900p to 11,300p but kept its “overweight” stance and recommended using the weakness as a buying opportunity.

It highlighted the company’s defensive earnings profile at a time of increased economic uncertainty, adding that recent selling for shares due to concerns over prospects for the Watson-Marlow fluid technologies division appear overdone.

The City bank said: “We see this as a rare opportunity to revisit one of the highest-quality names in our coverage.”

The shares were as high as 13,000p during 2022 after Covid-19 vaccines work provided a major boost to Watson-Marlow. Subsequent de-stocking by biopharma customers means the division’s sales fell 21% in today’s half-year results, although management pointed out that underlying demand remains as robust as in pre-pandemic periods.

The 130-year-old company’s two other divisions are involved in the control and management of steam and in electric thermal solutions for ultra-critical industrial applications. Sales rose 15% and 7% respectively as overall revenues lifted 13% to £850.8 million.

A less favourable sales mix put pressure on the operating margin as pre-tax profits fell 12% to £153.5 million, but the interim dividend due for payment on 10 November still rose 8% to 46p. This continues 55 years of dividend growth at a 10-year compound growth rate of 11.1%.

Special dividends were paid in 2010, 2012 and 2014 but in the near term the company is looking to reduce leverage following recent acquisitions.

Nicholas Anderson, who is stepping down as chief executive in January, backed the company to ride out the short-term headwinds as it looks to benefit from a “clear opportunity” to accelerate the decarbonisation of industrial processes.

His optimism is shared by Morgan Stanley, which lowered its earnings estimates for this year by 13% but only trimmed its price target by 4% to 11,800p.

Beyond the de-stocking pressure affecting the biopharma and semiconductor verticals in the second half of this year, it sees a “multi-year structural growth tailwind” from 2024.

It notes the Steam Specialties division continues to outperform wider industrial trends and that Electrical Thermal Solutions has a significant opportunity from decarbonisation. 

The bank described the company as the best-in-class franchise in UK engineering and well placed because of several key business drivers, such as 85% of group sales coming from operating rather than capital expenditure budgets.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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