The Spirax-Sarco Engineering (LSE: SPX) stock is popping today, with an increase of almost 4% from yesterday’s close. As I write, it is the fastest rising FTSE 100 stock. It is even making a lot of news. As someone who has been watching the Spirax-Sarco share price for a while now, this looked like a good time to explore what is going on with it.
Spirax-Sarco share price rises on results
The company released its results earlier today, which have clearly pleased investors. Its revenue is up some 13% in 2021 and its earnings per share are up by 35%. Its dividends have also risen by 15%.
Its net debt to EBITDA, which is short for earnings before interest, taxes, depreciation, and amortisation, is down to 0.35 times. By comparison, the number was at 0.7 times last year at this point. Even last year’s number is not worrisome, but the fact that it has halved from even there is good news indeed.
The company is also largely positive about its prospects for the current year. It expects organic sales to grow at rates “well above” those for global industrial production, whose increase has ranged between 4% and 4.4% in 2022 so far. It also expects the adjusted operating profit margin to remain “comfortably above pre-pandemic levels” in 2022.
High valuations for the FTSE 100 stock
It is not all roses here, though. The big stumbling block I face when considering investing in the Spirax-Sarco Engineering stock is its valuation. It has a price-to-earnings (P/E) ratio of 40 times right now, and it does not help that it is the most highly priced FTSE 100 stock even in absolute terms.
I could also look at its price-to-sales (P/S), considering that it is a growing company, but even that is higher than that for its global peers at around 6.5 times. In other words, whichever way I look at it, the stock looks pricey to me.
Its high valuation could be justified if it were a classic defensive like healthcare or utility stocks. But that is not the case. It is linked to global industrial production, which by its very nature is a cyclical economic activity.
What I’d do
Yet, I cannot help but notice that over the past five years, the Spirax-Sarco share price has almost tripled. And this is after it has seen a huge correction since late last year. If this correction had not happened, its share price would have quadrupled in five years.
That it has seen fast growth is also evident in the fact that when I first wrote about the stock in 2019, it was part of the FTSE 250. Now it is the most expensive FTSE 100 stock. Clearly, it is doing something right.
As things stand, however, I would put it on my investing watchlist right now, when there is a fair bit of economic uncertainty around. But I would like to dig deeper into this stock to figure out if there is anything I am missing here. It might just change my mind!
