Peel Hunt’s red pen was out in force on Friday, as it downgraded Diploma PLC (LON:DPLM), Spirax-Sarco Engineering PLC (LON:SPX) and Arrow Global Group (LON:ARW).
In a note on the cyclicals of the industrial sector, the broker brushed off a quote often attributed to Mark Twain that, “history doesn’t repeat itself, but it often rhymes”.
READ: JPMorgan starts Diploma with ‘overweight’ rating, prefers to Electrocomponents started as ‘neutral’
This “feels particularly pertinent” as the flight to safety in 2019 pushes the premium for a handful of UK industrials stocks to "nose-bleed multiples" not seen since the financial crisis, with the more defensive names marking new highs, day after day, nodding towards deserved cases of Halma and Spirax-Sarco.
Valuation multiples in the sector have polarised, the analysts said, but, barring another global meltdown, they expect the valuation gap to narrow.
Investors “will begin to look through potential downgrades in H2 and return to the cyclicals, specifically those we feel the stock market has not fully acknowledged the structural improvements achieved over the past 10 years”.
However, while premiums are justified, Peel Hunt downgraded its recommendations on Diploma and Spirax-Sarco to ‘hold’ from ‘add’ on valuation grounds, with respective shares price targets of 1,600p and 8,450p.
READ: Berenberg prefers “outstanding” Spirax-Sarco over rival engineers Spectris and Rotork
The analysts however did reiterate their ‘buy’ recommendations for Bodycote PLC (LON:BOY) at a target of 925p, Synthomer PLC (LON:SYNT) at 500p, Vesuvius Plc (LON:VSVS) at 715p and Rotork PLC (LON:ROR) at 360p.
In a separate note on debt purchaser Arrow, after it announced the appointment of a new chief financial officer as Paul Cooper resigned in order to take up a position at M&G Prudential, Peel Hunt gave up on the shares, even though they trade at less than six times full year earnings.
“Given the long-term challenge of cash flow visibility and high leverage and with the shares up 10% in the last month- at these levels we move our recommendation to ‘reduce’ from ‘hold’.”