Spirax-Sarco shares have further to fall, says RBC

RBC Capital Markets has slashed its target price for Spirax-Sarco Engineering from 9,000p to 8,000p and reiterated an 'underperform' rating on the stock, saying the valuation still isn't cheap despite its underperformance this year.

"One of the most frequent investor questions we get at present is whether Spirax is now interesting give the share price weakness. Forecasts may be finding a bottom (after falling ~25% YTD), but we still see the valuation as relatively high for a business with some structural challenges," the broker said in a research note on Friday.

Earnings forecasts for Spirax had dropped as a result of a weaker backdrop in Biopharm, Semis and general industrial production. A rebound is expected next year, with the Watson-Marlow unit (which makes peristaltic pumps and associated fluid path technologies) being the key driver.

"The 20-year organic sales CAGR of Spirax has been twice the sector level. However, in the last decade the mix of this growth has become heavily weighted to Watson-Marlow, with the rest of the business only marginally outgrowing our wider coverage group," RBC said.

"With improved structural drivers across most of our wider coverage group over the next few years we forecast a growth rate for Spirax that is less differentiated from our coverage group, and ex Watson-Marlow it is in line."

The shares are now nearly 50% below their 2021 peak of around 15,000p to 16,000p – having fallen by 14% in 2023 alone. Despite that, Spirax's valuation is still at a premium to most of stocks in RBC's coverage group, the broker said.

Shares were down 0.3% at 9,224.83p by 1053 GMT.