As a long-term investor, I am always on the lookout for shares I can buy and hold for years, or even decades. With a long history and promising future, Spectris (LSE: SXS) is on my radar. The company released its interim results today, which seems like a good moment to reflect on whether its shares could be a good fit for my portfolio.
Here is a trio of things I like about the business — but also why I do not plan to invest in it right now.
1. Pricing power
Competing in a commoditised market, a business often has to offer low prices to make sales. That can mean tight profit margins or even losses.
By contrast, when a company has pricing power, it can often generate attractive profit margins as customers believe it offers them something worth paying for.
I think Spectris has some pricing power, which explains why it reported a 9.8% pre-tax margin in today’s results.
That is not spectacular, but is attractive to me. With its focus on making equipment and software for “the world’s most technically demanding industrial applications”, Spectris is selling to a customer base where quality and rigour matters. That helps give it pricing power.
2. Growth focus
In industrial markets, scale can often matter. If a company stays small it can become a target for acquisition.
Spectris continues to grow – both organically and through making acquisitions. The company said today it has an active M&A (mergers & acquisitions) pipeline.
Sales during the first half were 23% higher than in the same period last year. That is the sort of increase more commonly associated with a racy growth company than a long-established industrial supplier.
That might not be typical. After all, last year’s interim sales were almost identical to what they had been a decade ago.
But the strong start to this year underlines how a focused strategy, good execution and expanding footprint could help the company keep growing sales. Indeed, in today’s interim results, Spectris upgraded its organic sales growth forecast for the full year to 6-7%.
3. Untapped potential
Despite its growth, Spectris remains a minor player in a massive and fragmented market.
Although the firm referred to market share gains in today’s announcement, it did not elaborate on them. But I think there is a sizeable opportunity for it to grow its share in many markets as well as expand into new ones.
For example, sales in the Middle East, Africa and South America combined in the six months were smaller than those in Japan alone.
Valuing the shares
Although I see reasons to be bullish about Spectris shares, there are also risks.
Inflation could eat into profit margins in coming years. The company’s focus on new product development could help it grow but may also increase R&D costs.
On balance, although I like the business, I am not that excited about the current valuation of Spectris shares.
They trade on a price-to-earnings ratio of 33, which looks costly to me even for a quality company. On that basis, for now I have no plans to buy.
