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Shares in Spirax Group (LSE:SPX) have fallen 35% in the last 12 months. But that puts the FTSE 100 stock in unusually attractive territory and there are some familiar themes emerging.
A combination of increased debt, higher interest costs, and a cyclical downturn have been weighing on the business. But that looks a lot like the position Rolls-Royce was in at the end of the pandemic…
Overview
Spirax manufactures equipment that helps industrial operations like factories manage temperatures throughout their manufacturing processes. That might involve heating, cooling, or regulating.
Its systems are often highly technical and mission-critical for its customers. This means the business benefits from resilient strong demand while also being difficult for other companies to disrupt.
Acquisitions have been key to Spirax’s growth over the last 10 years. By buying other businesses, it has expanded from steam-based solutions to include electric-based systems.
Doing so has allowed the firm to expand its installed base of systems significantly. And the servicing and maintenance of these has provided the company with long-term, high-margin revenues.
Debt and demand
All of this sounds good, so the obvious question is why’s the stock been falling? The answer is Spirax’s revenues, margins, and profits have all come under pressure over the last few years.
Most recently, demand from China – a key industrial market – has faltered. That’s caused the FTSE 100 firm’s sales to decline in the last couple of years.
Over the longer term, the company’s acqusitions have proved expensive. Spirax’s long-term debt’s gone from below £100m in 2016 to over £870m in 2024, which has caused interest costs to rise.
As a result, margins have contracted and earnings growth has slowed and that’s a sign of the ongoing risks with the business. But I think investors might have room for optimism.
Valuation: a once-in-a-decade chance
The falling Spirax share price has put the stock in interesting territory. On a price-to-earnings (P/E) basis, it trades at a multiple of around 22.
That’s unusually low for the company, though it’s not meaningfully below where it was in 2018. But earnings have been volatile and that can make the P/E ratio an unreliable guide to valuation.
In these situations, price-to-sales (P/S) and price-to-book (P/B) can be much more accurate metrics. And based on either of these, the stock’s trading at some of its lowest multiples in the last 10 years.
In other words, I think Spirax shares are unusually cheap at the moment. More importantly though, I think there are clear similarities the FTSE 100’s top-performing stock of the last five years.
The next Rolls-Royce?
At the end of the pandemic, Rolls-Royce had gone through a sharp drop in demand that had caused its debt to shoot up and its interest costs to surge. And we all know what’s happened since then.
I think it’s striking how similar the situation with Spirax is at the moment. To some extent, the firm’s problems are of its own making, but I think there could be similar opportunities ahead.
The stock’s a reminder of the risks that come with growth by acquisitions. But with its debt already starting to come down, investors should seriously consider whether now might be the time to buy.
