Today’s first half results from Spirax-Sarco (LSE: SPX) show that the industrial engineering company is making excellent progress. Its organic sales rose by 5% and adjusted operating profit increased by 18%. This was due to an adjusted operating margin increase of 1.9% which was aided by growth in both the Steam Specialties and Watson-Marlow businesses.
The result was recorded against flat global industrial production growth rates and, despite challenging conditions, Spirax-Sarco has been able to grow organic sales across all divisions of the Steam Specialties business. This has allowed it to increase interim dividends by 8% so that the company now yields 1.7%.
Looking ahead, Spirax-Sarco is expected to benefit from weaker sterling as well as its £3.9m acquisition of Brazilian valve manufacturer Hiter (also announced today). Still, its shares look expensive since they trade on a price-to-earnings (P/E) ratio of 27 and with the company’s bottom line forecast to rise by just 6% next year, it may be prudent for investors to take a look at other stocks within the industrial sector.
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Bid opportunity?
One such company is Rolls-Royce (LSE: RR). It’s currently in the midst of a major turnaround following a challenging period that has seen its profits fall significantly. In fact, Rolls-Royce’s earnings are expected to have fallen by 61% between 2013 and 2016. But with a new management team and a strategy to boost the company’s sales and profitability, Rolls-Royce is due to return to growth next year with its bottom line expected to increase by 35%.
This puts it on a forward P/E ratio of 22, which is acceptable given its growth prospects but is hardly cheap. Despite this, it seems to be a stock worth buying for the long haul since it has a wide economic moat and a dominant position in a number of key markets. Clearly, volatility is likely due to its uncertain outlook, but it remains a realistic bid opportunity with sterling continuing to weaken.
Lower risk
However, when it comes to the most appealing industrial play at the present time, BAE (LSE: BA) ranks as my top choice. Its shares trade on a P/E ratio of just 13.5 and yield 4% versus only 1.6% for Rolls-Royce. Furthermore, BAE is set to benefit from an improving outlook for the wider defence sector and its earnings are due to rise by 8% next year. This has the potential to positively catalyse its bottom line and allow it to record further capital gains following its 12% rise over the last year.
As well as being cheaper and better-yielding than Rolls-Royce, BAE is also less risky. It has a stable business model and isn’t mid-way through a major transformation plan. Therefore, its risk profile is lower and this means that a narrower margin of safety is required to merit investment. So while Rolls-Royce is a strong buy, BAE seems to be the best industrial sector company on offer for now.
