Are Rolls-Royce Holding plc, Rotork plc and Spirax-Sarco Engineering plc three stocks to make you rich?

Should you pile into these three industrial stocks right now? Rolls-Royce Holding plc (LON: RR), Rotork plc (LON: ROR) and Spirax-Sarco Engineering plc (LON: SPX)

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Today’s trading update from Spirax-Sarco (LSE: SPX) shows that the steam management and peristatic pumping specialist is making encouraging progress in a tough market.

As such, its sales growth for the four months to the end of April was in-line with a year ago. But Spirax-Sarco sees an uncertain time ahead for industrial production growth and it’s therefore intent on keeping a tight control of costs. Furthermore, it’s focused on self-generated growth in order to reduce reliance on the market.

With Spirax-Sarco trading on a price to earnings (P/E) ratio of 22.9, it seems to be very expensive given the challenges which it’s currently facing. And while its bottom line is expected to grow 6% this year and by a further 5% next year, the company’s rating could come under pressure and send its shares lower after gaining 235% in the last 10 years.

Expect a fall in earnings

It’s a similar story for Spirax-Sarco’s industrial sector peer Rotork (LSE: ROR). It trades on a P/E ratio of 20.8 and yet it’s expected to record a fall in earnings of 13% in the current year. This has the potential to cause investor sentiment in the stock to deteriorate and push Rotork’s share price down following a 4% gain since the turn of the year.

Of course, Rotork is forecast to return to positive earnings growth next year. But growth of 4% in 2017 may be insufficient to cause a step change in investor sentiment. With a yield of just 2.9%, Rotork seems to lack appeal for value, growth and income investors. Certainly, it is a relatively high-quality business which could be a top performer in the long run but with challenges ahead, it may be a stock to watch rather than buy.

Challenging conditions

Meanwhile, Rolls-Royce (LSE: RR) is also expected to endure a tough 2016. That’s due to challenging operating conditions and also  short-term pain as new management seeks long-term gain. As such, Rolls-Royce’s net profit is set to decline by 58% this year and this could cause investor sentiment to come under a degree of pressure in the coming months.

However, Rolls-Royce is set to bounce back next year with earnings growth of 33%. This has the potential to boost its share price and with the company’s price-to-earnings growth (PEG) ratio of only 0.5, it seems to offer a wide margin of safety. This means that even if earnings forecasts are downgraded, Rolls-Royce could still outperform its sector and the wider index. So, while it is still a relatively risky buy due to the major overhaul which is due to take place as it seeks to improve its financial performance, Rolls-Royce seems to be an excellent stock to help make you rich.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Rotork. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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