Spectris (SXS) £28.48

Gain to date: 5.1%

Original entry point: Buy at £27.09, 28 April 2022

We’re pleased to say it has been ‘full speed ahead’ for precision measurement firm Spectris (SXS) since our initial recommendation in April.

Despite growing evidence of a global slowdown, organic sales have continued to grow at an impressive rate and the firm has continued to return capital from the sale of its Omega Engineering division.

WHAT’S HAPPENED SINCE WE SAID BUY?

The company posted a 9% increase in underlying sales in the second quarter and improved on that in the third quarter with an 11% increase, driven as before by strong orders from Asia and North America.

It also repeated its guidance of a high single-digit increase in underlying sales for the full-year thanks to its growing order book and an increase in the operating margin thanks to price rises, although supply chain issues and ongoing cost inflation are still live issues.

As well as returning cash from the Omega sale to investors through a share buyback, of which £150 million was completed in the first half with the remainder due to be completed by year-end, the firm has made a series of small bolt-on acquisitions to augment organic growth.

There has been one larger deal, the purchase of Dytran Instruments for £66 million, which expands Spectris’s sales in the US in the aerospace and automotive industries.

Ahead of its capital markets day last week, the first for three years, the firm set out a strategy showing how it would compound growth into the future supported by organic investments and acquisitions, while growing its margins.

New medium-term targets were introduced including organic sales growth of 6% to 7% through the cycle and an adjusted operating margin north of 20%, well above last year’s 16% and consistent with the 21% margin at the half-year stage.

WHAT SHOULD INVESTORS DO NEXT?

The company’s new targets look ambitious but achievable, and we welcome the prospect of higher growth and higher total returns.

Analysts will have to upgrade their medium-term outlook for the stock which should in turn lead to a re-rating, so we think the shares remain worth holding.

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