Why this quality stock surged in the FTSE 100

The quality credentials of Spirax Group (LSE:SPX) were back in the FTSE 100 spotlight today after results-day guidance boosted hopes that the engineer’s prolonged downgrade cycle is coming to an end.

The shares of Cheltenham-based Spirax, which have more than halved in value since 2022, jumped 18% in early dealings before settling 800p higher at a five-month high of 6,860p.

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City bank Morgan Stanley kept its price target at 7,900p following the results, believing that a 5% beat on half-year earnings and the company’s unchanged view on annual results opened up the potential for valuation multiples to start to re-rate.

Spirax currently trades with an enterprise valuation of 13.7 times forecast 2026 earnings, which is broadly in line with the capital goods sector. However, the bank notes that this is relatively attractive versus its European high-quality peer group in the range of 15-19 times.

The company, which listed on the London Stock Exchange in 1959 and has been a member of the FTSE 100 index since December 2018, peaked at 17,000p in November 2021 after Covid vaccines work provided a major boost to its Watson-Marlow fluid technology business.

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Subsequent destocking by biopharma customers alongside broader industrial weakness and slower growth in the high-margin semiconductor sector has since driven shares lower.

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. About 60% of its sales are to defensive sectors, such as healthcare, food and chemicals. 

Morgan Stanley added: “Looking forward, Spirax remains a high-quality cyclical with scope to outgrow short-cycle peers due to favourable end market exposure. In particular, biopharma newsflow is improving which should support a Watson-Marlow recovery in 2025.”

The bank’s optimism has been supported by the tone of today’s results after Spirax said a 10% orders uplift in biopharma should support higher second-half sales growth at Watson-Marlow.

The company also highlighted improved demand from semiconductor customers in equipment heating, alongside a large data-centre contract win.

The boost comes at a time when the outlook for global industrial production remains highly uncertain, having grown by 2.5% in the first half. Spirax outperformed this rate as revenues rose 3%, leading to adjusted profit growth of 1% to £139.9 million.

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Chief executive Nimesh Patel said: “While IP forecasts have been revised down for the remainder of the year, our unchanged full-year guidance is supported by strong order books going into the second half, increasing demand from key end markets, and ongoing delivery of operational priorities.”

Analysts at Jefferies said the overall tone of the results and commentary were “very resilient”, while counterparts at Citi highlighted upside potential to consensus expectations.

The latter, which has a price target of 8,000p, notes that the Spirax valuation premium to the UK industrial goods and services sector has narrowed from its historic level of 50% to about 30% currently.

It added: “Currently a U-shape recovery is expected in the biopharma market. If this recovery turns out to be V shaped, there could be rapid re-rating of the stock.”