The Motley Fool

Why I’d sell Rotork plc and Spirax-Sarco Engineering plc after today’s results

Two engineering stocks reporting today, Rotork (LSE: ROR) and Spirax-Sarco (LSE: SPX), have delivered impressive results. Both companies are moving in the right direction and are on track to meet expectations, at the very least. However, neither of them have investment appeal for the long term, since they trade on valuations which more than adequately factor in their upbeat outlooks.

Margins under pressure

Rotork’s third quarter performance was broadly the same as in the first half of the year. On an organic constant currency basis, Rotork’s revenue increased by 5.3% versus the same period of last year. Its investment in infrastructure has improved its operational performance, while its cost reduction programme is also progressing well.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

In terms of its reported sales growth, Rotork’s top line rose by 28.9%. This benefited from weaker sterling and the contribution from acquisitions. In fact, currency changes are now expected to deliver a 10% benefit to both full year revenue and profit. However, Rotork continues to experience a challenging trading environment. This is causing margins to come under pressure, with this situation likely to continue over the medium term.

What a drag

It’s a similar story for Spirax-Sarco. The global macroeconomic environment remains in the low-to-no growth situation that was a key theme of 2015 and the first half of 2016. As a result, the company’s organic sales growth in the first ten months of the year slowed modestly from that achieved in the first half of the year as several large projects were not repeated.

Even though it faces a tough operating environment, Spirax-Sarco is on track to meet full year expectations. Its performance will benefit from a revised strategy, which seeks to deliver improved performance versus its markets through being more effective in identifying and generating engineered solutions to help customers with sustainability, efficiency and productivity. As such, Spirax-Sarco appears to be well-placed on a relative basis, although a poor trading environment is likely to be a drag on performance.

Uncertain outlook

Looking ahead, Rotork is forecast to increase its earnings by 7% in the next financial year, while Spirax-Sarco’s bottom line is expected to rise by 11%. Both of these figures are highly impressive given the challenges they face. They show that the two companies have the right strategies and sound business models, which bodes well for the long term.

However, the market appears to have already priced in their upbeat performance. In Rotork’s case, it trades on a price-to-earnings growth (PEG) ratio of 3.1, while Spirax-Sarco’s PEG ratio is 2.1. Both of these figures lack appeal and indicate that there is little, if any, margin of safety on offer.

Given the uncertain outlook both companies face and their somewhat modest underlying growth rates, this means that neither of them offers investment appeal at the present time. As such, it may be best to look elsewhere for more favourable risk/reward ratios.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Rotork. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.