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.
