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.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Scene depicting the City of London, home of the FTSE 100

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »