This FTSE 100 stock just hit an all-time high. Should I buy?

FTSE 100 firm Spirax-Sarco Engineering plc (LON:SPX) is riding high, but Paul Summers questions whether the valuation is now too rich.

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FTSE 100 member Spirax-Sarco Engineering (LSE: SPX) may not be a company that grabs the headlines very often but that hasn’t stopped this hyper-reliable growth company from setting record share price highs recently. Today’s half-year results suggest there’s no danger of business drying up anytime soon.  

“Strong recovery”

Spirax is actually three businesses rolled into one. The first two divisions — Steam Specialties and Electric Thermal Solutions — provide customers with products related to fluid control and electrical process heating. The third business — Watson-Marlow — supplies “virtually maintenance-free pumps“. 

Positively, every part of Spirax showed excellent order book growth over the period. Indeed, CEO Nicholas Anderson reflected that the “strong recovery of global industrial production in the first half of this year, combined with exceptional COVID-19 vaccine related demand in Watson-Marlow, has supported strong organic sales and profit growth across all three businesses.” 

All told, revenue at Spirax rose 13% to £643.7m over the six months to the end of June. Pre-tax profit jumped 41% to £150m.

While far from being an income stock, it’s also worth noting Spirax hiked its interim dividend 15% to £38.5p per share today. Since any management team would be loathed to cut bi-annual payouts not long after raising them, I take this as an indication of just how confident the company is on its outlook.

As things stand, analysts have the company returning 129p per share in 2021. However, that equates to a yield of just 0.8%. So, while encouraging in itself, I wouldn’t be snapping up this stock if I were looking to live off the income generated by my investment portfolio. 

What’s not to like?

Taking into account today’s rise, SPX shares are up almost 45% over the last year. For a FTSE 100 juggernaut, that’s a brilliant result. The performance over the longer term is even more impressive. Since 2016, they’re up 250%. Even the market crash in March 2020 failed to disrupt this positive momentum for long.

Unfortunately, great stocks are rarely without friends. Before markets opened this morning, SPX shares were already trading at nearly 48 times earnings. Can such a valuation really be justified?

Well, the company definitely scores on the quality metrics I pay attention to. It generates consistently high returns on capital, for example. Margins are equally impressive too. In vast contrast to other FTSE 100 stocks, SPX also boasts a solid balance sheet with just under £193m in net debt (at the end of June). 

On the other hand, such a frothy valuation could make this a riskier play than it first appears. Any sign of a slowdown in economic growth and at least some investors may decide to bank profits. A new Covid-19 variant running riot could also cause disruption to Spirax’s supply chain. 

Buy this FTSE 100 stock now? 

All things considered, it’s really no surprise SPX continues to set new share price highs. This remains a great company in a niche market that consistently does all the right things. From a very long-term perspective, I’m inclined to think the shares will continue to perform for investors. 

Nevertheless, I’m not sure I’d make adding this company to my portfolio a priority right now. No stock is worth paying any price for, after all. In my opinion, the are a number of equally good companies available for far less elsewhere in the FTSE 100.  

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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