Analysing top FTSE riser Spirax-Sarco

Its shares are not cheap, but the unassuming engineering firm’s star appears to be on the rise.

A ‘case study in resilience’ is how one City analyst described Spirax-Sarco Engineering (LSE:SPX) today after the unassuming blue-chip stock produced better-than-expected 2020 results.

JP Morgan Cazenove's verdict on the Cheltenham-based thermal energy and niche pumping specialist shouldn't come as a total surprise given that this is a company that has weathered a fair few economic storms in its 130 years.

Spirax is now worth £8 billion and employs 7,800 people in 130 countries, with its steam systems used to heat hospitals, produce food on an industrial scale or sterilise pharmaceutical equipment. As well as improving efficiency, its services are key to meeting sustainability targets.

The company's steam and thermal solutions businesses saw sales fall last year, although its robust performances in the pandemic and the stand-out success of the Watson-Marlow fluid technologies arm meant 2020 profits were still 1% higher, at £240.1 million.

Watson-Marlow's organic growth of 9% came after sales to the pharmaceuticals and biotech sector jumped 20% as customers expanded their manufacturing in support of Covid-19 vaccine development and production. Demand was particularly strong in the last quarter of the year, leading to an increased order book that will benefit 2021 trading.

With optimism for the current year also building on the back of hopes for a rebound in industrial production, shares rose 4% at the top of the FTSE 100 index today. They had fallen to 7,710p in April but are now 11,410p in the wake of the 2020 results.

• Shares round-up: three FTSE 100 stocks with optimism
• The FTSE a year on from the Covid crash
• Stocks have had a fine February, but what will March bring? 

As you might expect for a stock with a strong defensive reputation, shares are not cheap, based on JP Morgan's enterprise value multiple of 23x 2022 earnings. The City firm has a target price of 10,600p and sees Spirax as a core holding in its European capital goods coverage.

Morgan Stanley also increased its price target by 3% to 10,000p, but also noted the bull case for the shares is now 13,300p, based on today's updated earnings forecasts and multiples.

Cash generation continues to be strong, with a conversion rate of 102%, leading to a final dividend 8% higher at 84.5p a share for payment on 21 May. This extends its 53-year record of dividend progress, with a compound 11% per year increase over the past decade.

The company joined the London stock market in 1959, having adopted its current name seven years earlier. It was promoted to the FTSE 100 index in 2018 on the back of acquisitions including industrial boilers firm Gestra and US-based heating firm Chromalox.

Road safety barriers specialist Hill & Smith Holdings (LSE:HILS) was another manufacturing-focused firm in demand after publishing 2020 results today. Its pre-tax profits came in 43% lower at £35.5 million, but a good recovery in the second half of last year has meant it is approaching the trading levels seen in 2019.

The company's prospects continue to benefit from the commitment to infrastructure spending in its core markets of the UK and US, including Whitehall's increased levels of funding for its RIS2 programme to improve the strategic road network.

About 70% of its profits come from the US, where its various businesses include one making high-strength fibreglass products for use in highly corrosive environments.

• What happens if you miss ISA season?
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

Analysts at Peel Hunt described the market backdrop as ‘undoubtedly favourable’ as they reiterated their ‘buy’ recommendation and 1,500p price target. The stock was today 2%, or 28p, higher at 1,350p, having hit 1,450p in early January.

The final dividend of 17.5p a share for payment on 9 July was much higher than the 12p a share forecast by Investec Securities, while net debt of £146 million was materially lower than hoped.

Hill & Smith is now run by Paul Simmons following the November departure of Derek Muir, who is credited with delivering significant returns to shareholders during 14 years in charge. This record made the company a regular member of the interactive investor Consistent Winter Portfolio, although the company was omitted from the 2020/21 line-up.

Investec, which has a target price of 1,600p, added today: “The new CEO is making positive changes. Hill & Smith provides high-quality exposure to increasing infrastructure spending and offers an attractive free cash flow yield of 5.7%.”