Spirax-Sarco stock down as FX headwinds weigh on 2025 earnings forecasts

Investing.com -- Spirax-Sarco Engineering Plc (LON:SPX) shares dropped over 3% on Tuesday after results flagged ongoing challenges and shifting market conditions.

Morgan Stanley (NYSE:MS) and RBC Capital Markets both noted that Spirax’s 2025 EBITA forecast has been revised downward due to FX headwinds. 

Morgan Stanley estimated EBITA at £343 million, 2.5% below consensus, while RBC projected 5% growth, below the 6% consensus and lower when adjusted for FX impacts.

Both brokerages cited the strengthening of the British pound as a major factor, with RBC maintaining an "underperform" rating and a price target of 6,500 pence, while Morgan Stanley revised its target to 8,100 pence from 8,500 pence per share.

In its divisional performance, Spirax (LON:SPX)’s Steam Thermal Solutions (STS) division reported 1% organic revenue growth for 2024, despite a 13% decline in China. 

Excluding China, STS achieved 4% growth, outpacing industrial production trends. However, margins declined due to lower contributions from high-margin Chinese business and the reversal of prior cost containment measures. 

RBC noted that STS growth was slightly below expectations and highlighted ongoing challenges in China and Korea.

The Electric Thermal Solutions (ETS) segment showed stronger results, with a 10% increase in organic revenue, supported by operational improvements in industrial process heating. 

ETS saw a 40% increase in shipments and a more than 20% reduction in backlog. RBC confirmed that H2 ETS growth reached 15%, boosted by de-bottlenecking at Chromalox.

Watson-Marlow posted 3% organic revenue growth, with Biopharma orders rebounding to double-digit growth. 

While Morgan Stanley noted supply chain efficiencies and operational improvements, RBC pointed out that Watson-Marlow underperformed consensus estimates of 4.6% sales growth, suggesting that backlog concerns persist.

Morgan Stanley remains cautiously optimistic, citing long-term growth opportunities in Biopharma and semiconductor manufacturing, while RBC expects downside risk to EPS due to FX effects, higher corporate costs, and Steam segment challenges. 

Both brokerages anticipate 2025 organic revenue growth to be consistent with 2024 levels, with a modest acceleration in the second half of the year.

While Spirax remains a high-quality cyclical name, Morgan Stanley sees its valuation as attractive given its strong pricing power, whereas RBC questions its premium multiple relative to sector peers.