Berenberg has kicked off coverage on three more of the UK’s biggest industrial engineers, and analysts there have plumped for pump maker Spirax-Sarco Engineering PLC (LON:SPX) as their preferred stock, over its rivals Spectris plc (LON:SXS) and Rotork PLC (LON:ROR).
The venerable Hamburg-based investment bank has Spirax as a ‘buy’, with a price target of 10,510p – 20% higher than where the shares currently find themselves.
By contrast, Spectris and Rotork were only worthy of ‘hold’ notes, with price targets of 2,440p and 280p respectively.
READ: Spirax builds up steam but warns about slowing industrial growth
Berenberg’s chin scratchers called FTSE 100-listed Spirax an “outstanding business”, which they are telling clients to hold for the long-term.
“It has strong and resilient organic revenue growth (4-5% through the cycle), sector-high operating margins (23%), very attractive returns on invested capital (>30%), strong cash generation (90% FCF conversion) and a dividend that has increased for 51 consecutive year,” they said in a note to clients.
“It is a well-managed, quality compounder, that is highly diversified by end-market, customer, and geography and we believe it absolutely warrants the premium valuation that it trades on.”
As for FTSE 250-listed Spectris, which sells temperature and humidity measuring equipment, Berenberg believes it is too early to tell if a new management can lead a much-needed turnaround.
“Following several years of subdued financial performance, a new management team has joined the business and a strategic review is underway. This has injected some excitement into the story.”
The bank added: “Our conclusion is that Spectris can become a much-improved business, but it is very early days, and near-term trading poses several challenges.”
Rotork’s growth plans might be ‘over-ambitious’
Fellow FTSE 250 constituent Rotork, which specialises in flow control equipment, is also under the watchful eye of a (relatively) new chief executive who is in the middle of implementing “comprehensive” growth acceleration programme.
Kevin Hostetler, who joined just over a year ago, wants to return the group to mid-high single-digit revenue growth and mid-twenties margins, but Berenberg’s analysts aren’t convinced.
“Our view of this is mixed: 1) we believe the top-line target is achievable, so long as the oil price remains stable; 2) the mid-twenties EBIT margin target feels over-ambitious, and pushing too hard on costs risks damaging the business; 3) the balance sheet is one of the strongest in the sector, with firepower of up to £400mln for the right series of deals.”
Unsurpsingly, of the three companies, Spirax’s shares were the best-performing, up 2.9% to 8,775p having been boosted by a trading update on Wednesday. Rotork shares edged 1.1% higher to 290.4p, while Spectris dipped 0.6% to 2,547p.