Some blue-chip companies don’t shout about themselves much; they just quietly get on with trying to make money. One of these is Spirax-Sarco Engineering, an £8.4 billion industrial manufacturer whose specialist pumps and valves are in widespread use across multiple commercial sectors, from consumer goods to oil and gas to healthcare.
The company, an expert in steam and thermal energy, has long been a performer, both financially and on the stock market — and its shares do not come cheap.
But while there is plenty that it can do to control costs and margins and make sure that its products are top drawer, a good deal of its fate lies in the health of the customers in the industrial markets that it serves.
Spirax-Sarco was founded in London in 1888 as a general merchant. It has grown through a series of acquisitions, including of the manufacturers Spirax and Sarco, and listed its shares in 1959.
Now a constituent of the FTSE 100, in its most recent financial year Spirax-Sarco generated a pre-tax profit of £236.8 million on revenues of just over £1.2 billion.
Put simply, its products control the flow of gases and fluids used to transfer heat or sterilise products.
There are three divisions: steam specialities, which is the largest revenues generator; electric thermal solutions, including the Chromalox business; and Watson-Marlow, for particularly specialist pumps.
With more than 50 per cent of its sales serving the essential areas of hospitals and healthcare, pharmaceuticals, food and drink and power generation and water treatment, all of its facilities have stayed open during the pandemic.
Not surprisingly, there have been disruptions to its supply chain and pressure on revenues as a result of industrial customers shutting sites or limiting access during lockdowns.
Pandemic-induced restrictions on both supply and demand meant that during the first half of last year global industrial production fell by 7.9 per cent and much more in Europe and North and Latin America. Trading at the group seems to have held up well against this backdrop, with group revenues falling by a less precipitous 4 per cent over the period.
The performance of the respective divisions was more mixed: revenues were down by 9 per cent at steam specialities, up 7 per cent at electric thermal solutions and 5 per cent higher at Watson-Marlow.
With steam, the drop was mainly the result of geographical exposure to industry. The respective increases were largely due to a boost from the acquisition in 2019 of Thermocoax, a highly specialist electrical thermal product maker, and strong sales by Watson-Marlow to the pharmaceuticals sector.
As countries began to come out of lockdown trading remained resilient, though underlying sales still fell — albeit at a lower rate — in every unit apart from Watson-Marlow.
So it is the overall outlook for industrial production that will be a key force in dictating how Spirax-Sarco fares this year. It has to be said that the signs are not encouraging.
As the company said in its latest trading update in November, there were signs of a slowdown in the growth of industrial output during the final months of last year. With powerhouse economies such as the US still in the thick of the crisis and others going back into lockdown, it doesn’t augur well for production over the coming months.
The engineer has plenty of good qualities, among them good cost control, strong margins and a healthy market share. But the shares are very highly rated. With the shares up 155p, or 1.3 per cent, at £116.40 yesterday, it’s probably time to take some profits.
ADVICE Sell
WHY The outlook for the industrial markets it serves looks bleak and the shares are very highly rated
Inchcape
It says much about the business model at Inchcape that, against the backdrop of weak demand for new cars and a global pandemic, the motor dealer upgraded its annual profit forecast late last month.
While it’s true that last year’s earnings will be a shadow of 2019’s, analysts have pencilled in a swift recovery, and the share price is returning to its pre-Covid level.
Inchcape traces its history back to a merchanting partnership formed in 1847 in Calcutta. After a wave of crises during the 1990s, Inchcape retained the name in the wake of a break-up.
In the UK the company is a traditional forecourt retailer of new and second-hand cars, traditionally a low-margin enterprise exposed to the ebbs and flows of motorists’ wants. In most of the 32 other markets in which it operates, it is a distributor, responsible for ordering styles, and their number, as well as the importing and sales process, often owning the forecourts too.
Not only is this model higher margin, but it also gives Inchcape flexibility in responding to trends in demand and controlling the sales process. The group works for brands including Toyota, Daimler and BMW, and also operates a lucrative after-sales service.
The shutdowns during the second quarter effectively froze motor sales and had a sharp knock-on effect on the business. But as restrictions were removed, the retailer began to benefit, with some better-than-expected bounce-backs in trading, including in Russia and the UK. In those countries where it is a distributor, being in control of when to cut prices will have helped reduce the size of the blows.
Duncan Tait, the former Fujitsu director who has been chief executive since the middle of last year, is expected to accelerate the moves into new markets, make greater use of data and analytics and drive through acquisitions of individual dealers and networks.
When this column recommended buying Inchcape shares in December 2019, they stood at 687p. Yesterday, they closed up 9p, or 1.3 per cent, higher at 678p, changing hands for 16 times Peel Hunt’s forecast earnings and with a dividend yield of 2.4 per cent. Those who bought should stay invested and expect further growth.
ADVICE Hold
WHY Resilient motor retailer with strong business model
