Spirax: What We Think of the Stock After Earnings

Key Morningstar Metrics for Spirax Group

• Fair Value Estimate
  : GBX 9,100
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Spirax Group’s Earnings

Spirax reported 6% adjusted organic operating growth in the first half, translating to 10 basis points of margin expansion to 19.8%. Management reiterated full-year guidance for mid-single-digit organic revenue growth and adjusted operating margin above 20.0%. Shares are trading 6% lower on Aug. 11.

Why it matters: We remain confident that Spirax is executing on its turnaround and that our midterm adjusted operating margin estimate of 22.6% is achievable. Our investment thesis hinges on a recovery in biopharmaceutical demand and operating margin improvement in the electric thermal solutions segment through self-help measures, both of which were evident in the first half.

• First-half results were damped by modest organic revenue growth and a 170-basis-point contraction in organic adjusted margin in the core steam thermal solutions segment, which is typically the most resilient division. We attribute weaknesses to short-term factors, including growth-accretive investments and some shipments moved into the second half, which do not detract from the group’s medium-term outlook.
• In our view, the negative market reaction is likely driven by profit-taking, with the shares having rallied 16% over the last month before the announcement of first-half results, as investors will need to wait longer for the margin expansion story to materialize and were hoping to see more meaningful improvement.

The bottom line: We maintain our GBX 9,100 fair value estimate and Wide Morningstar Economic Moat Rating after digesting first-half results. We think the pullback presents a buying opportunity, with shares trading at a 20% discount.

• We remain confident that Spirax will deliver 8% annualized earnings per share growth over the next five years. First-half results showed that the key milestones in our investment thesis are being met.
• We believe the group is making the right investments to rely less on industrial production to drive growth, even if they are dilutive in the short term.