- Spirax-Sarco has delivered triple-digit returns in the last half-decade
- Its average return on capital is higher than 40%
- Potential problems emerge with its manufacturing division that could impede future growth
Spirax-Sarco (LSE:SPX) share price has given investors an excellent return on their investment. A 210% return in the past five years is an investor’s paradise, I believe. Currently trading at a price of around 12,700p, will this UK stock continue to climb? Let’s explore.
Spirax Sarco operates across various industries, including food & beverages, machine manufacturing, and oil & gas, to name a few. In my opinion, the company’s vast clientele gives it an edge in the industry. Hence, the successful business it owns today.
Financial performance at a glance
The steam manufacturing company has consistently been delivering strong financial performance. Specifically, the 7% underlying revenue growth (excluding 2017 acquisitions) and the 11% dividend compounded annual growth rate over the past 10 years make it an excellent company to invest in, in my opinion.
In the recent half-yearly report, the UK group reported a 13% increase in revenue on a year-on-year basis. In addition, earnings per share rose by a whopping 41%. Finally, what could make Spirax-Sarco a lucrative investment for my portfolio is the 15% increase of dividend to 38.5p.
Spirax-Sarco share price performance
Spirax-Sarco share price has been steadily growing over the past years, as per the below chart. In my opinion, it is one of those few companies which has experienced steady growth. Moreover, this steady growth is accompanied by fewer dips in share price, indicating less volatility.
Looking at the past two years, the stock has appreciated by approximately 50%.
Will the Spirax-Sarco share price continue to climb?
The company’s return on equity is a good indicator of its future ability to generate profits. Looking at the past five-year return on capital, the manufacturing company is generating an above 40% return on average. I believe this is quite impressive. Also, the company has generated an approximate 10% revenue growth over the past five years, which is decent enough for its future development.
Bumpy operational performance
Spirax-Sarco has experienced very strong demand across all its businesses. In fact, orders were highest in its Watson-Marlow division due to Covid‐19 vaccine-related demand in the Pharmaceutical & Biotechnology sector.
But unfortunately, the manufacturing company faced difficulty in meeting this elevated demand. As a result, it faced delays in shipment. Despite having a diversified and resilient supply chain, the company had no backup plan for the disruptions experienced globally across all sectors. Hence Spirax-Sarco reported comparatively fewer sales growth in the current year.
I feel this is a weak point management will need to rectify moving forward. And if it fails to solve this, it could compromise Spirax-Sarco’s share price.
Final thoughts
Despite the manufacturing hiccup, Spirax-Sarco looks like a strong business to me. With solid financials and rising demand for its services, I am tempted to add this stock to my portfolio despite the risks.
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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies, assets, and strategies mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.
