Reliable Rotork is cheaper, but for how long?

With a reputation for delivering performance through thick and thin, this dip could be an opportunity.

On a mission to “keep the world flowing for future generations”, Rotork (LSE:ROR) is a British engineering company that's quietly grown into a £3 billion stock market success story.

Canny investors who picked up Bath-based Rotork a decade ago will have been handsomely rewarded, with the stock up 170% over this period. For everyone else, days like today when shares fall by as much as 8% present an intriguing possibility to tuck away a company with a reputation for delivering through thick and thin.

Rotork, which operates in markets where the flow of gases or liquids needs to be controlled, has continued to perform well overall — even if the timing of recent orders means that it now expects to deliver modestly lower annual sales than a year earlier.

This was the trigger for today's fall-back in shares to 308p, although Rotork says it is still making progress on its core ambition for an operating margin in the region of 25%.

Source: TradingView Past performance is not a guide to future performance

Analysts at Stifel said they were not overly worried by today's update, given the company's improved order intake and positive trajectory on margins. They added:

"Rotork appears to be executing well on its company plan and efficiency measures.”

However, the broker reckons share price upside may be limited until there's a “clearer line of sight” on a resumption in revenue growth, particularly after a strong run for shares.

This valuation concern is reflected in a chunky price/earnings multiple close to 25x, although Stifel is holding out for the FTSE 250 index stock to eventually reach 350p. Rotork last hit this level in the summer of 2018. Among other brokers, UBS is at 352p with Jefferies slightly more cautious at 338p, JP Morgan Cazenove at 336p and Morgan Stanley priced at 296p.

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The oil and gas sector accounts for more than half of the group's revenues, with power generation, water & sewage, marine and mining the other industries in its portfolio.

Rotork said today that large project activity had been subdued but that customers were continuing to spend on maintenance and repair as well as automation projects. A greater than usual proportion of these recent orders won't be for delivery until next year, scuppering its sales expectations for 2019.

Margins continue to accelerate upwards under the company's Growth Acceleration Programme, which has seen end-market reorganisation work completed in Asia Pacific and underway in Europe and the Middle East. The operating margin in August's half-year results stood at 21.1%.

Jefferies said it expects margins for the year to be better than the market currently assumes, with cash generation also looking strong. They added:

“With good progress being made in the areas Rotork can control, the long-term equity story is intact, although an improved top-line story would be welcomed.”