The Spirax share price has gone nowhere in five years! Time to buy?

The Spirax share price stands almost exactly where it did five years ago. Our writer asks why? And, more importantly, should he invest?

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It is easy to think of Spirax (LSE: SPX) as a big success story. The once little engineering firm has grown its revenues substantially and since joined the FTSE 100 index of leading shares.

The dividend per share has also grown every year for over half a century. Yet, over the past five years, the Spirax share price has essentially gone nowhere.

As I write on Wednesday (17 July), it stands within 0.4% of where it was five years ago. While the track record of regular dividend increases is superb, the current yield of 1.8% is well below the FTSE 100 average.

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Created with Highcharts 11.4.3Spirax Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Is this a red flag – or a buying opportunity for my portfolio?

Strong business model

Spirax has performed strongly in some ways as a business over the past five years. Last year saw revenues of £1.7bn, 46% higher than five years ago. Profit before tax fell 15% during the period to £245m, while basic earnings per share showed a steeper fall, of 18%.

Despite the fall in profits, the dividend per share grew 60% over the course of those five years. It continues to be covered 1.6 times by earnings, meaning that there is room for further growth in the shareholder payout even if profits are flat.

Setting aside for a moment the fall in earnings, it is worth noting some strengths of the business model. The revenue growth has been strong and net profit margins of around 11% strike me as attractive.

With a line-up of products that includes many unique products, a large customer base with specific ongoing machinery requirements and a lot of in-house engineering expertise worldwide, I think Spirax could continue to perform well as a business over the long run.

A high valuation

Still, the company does face risks. As the fall in profits has shown, revenue growth can come at a cost (something investors may not like). Integrating dozens of different businesses, managing the complex supply chains of a large, growing business and facing weak industrial demand in some markets have all hurt profits and remain an ongoing risk.

Set against that, I think that the Spirax share price, despite a dizzying ascent, has now moved back almost exactly to where it stood five years ago, makes sense.

In fact, despite that disappointing performance, I continue to see Spirax shares as overvalued.

They trade on a price-to-earnings (P/E) ratio in the thirties. That is too high for me, not just because I do not think it fully reflects the risks, but also because I do not think the valuation is attractive.

If I buy shares in a business – even an excellent one – yielding under 2% and with a P/E ratio that high, where will my possible financial returns come from?

One answer could be higher earnings. If Spirax can regrow those, its prospective valuation may be more attractive. But whether profits will grow strongly in coming years remains to be seen. For now, I am watching but not investing.

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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.

C Ruane 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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