Spirax-Sarco Engineering

Little-known market leader in steam systems and more

For several weeks now, inflation has once again been a dominant topic on the stock market. No wonder - after all, in November inflation in Germany rose to its highest level in 29 years. The Federal Statistical Office estimated it at probably around 5.2 percent - well above the ECB's 2 percent target. But even with a "normal" inflation rate of 2 percent, you effectively lose a lot of money year after year. And the solution is obvious: you have to invest your money sensibly - for example in real estate, cryptocurrencies, tangible assets, precious metals, or in stocks and ETFs. What matters is that you only invest money you can easily do without for the foreseeable future. There will always be fluctuations, of course, and there's nothing worse than having to close your positions at the worst possible moment just because you need money.

Today I'd like to introduce another company that has so far been a wonderful way to protect yourself against inflation. The engineering group Spirax-Sarco Engineering is one of the leading manufacturers of steam management systems, thermal solutions, and fluid path technologies. Without a doubt a business you'll rarely read about - so let's not waste any time and take a closer look at the company.

The history and business model of Spirax-Sarco Engineering Public Limited Company

Let's take a little detour into the history of the steam engine before we turn to the industrial group Spirax-Sarco Engineering. Probably around 700,000 years ago, the first humans managed to start a fire on their own. History experts believe the power of water was first harnessed in China 5,000 years ago - another 1,000 years later, people also started using wind power in the first mills. But the wind doesn't always blow, and waterworks couldn't be used just anywhere either. So a more flexible and efficient source of power was needed, but it was a very long time coming. Only in 1690 did the first prototypes of a steam engine appear, working by means of a piston and cylinder. These still had some problems and were continuously improved. It wasn't until 1769 that James Watt presented his patented steam engine, which soon powered the first factories and led humanity into the industrial age.

Steam was a powerful heat source, but the cooled condensate often caused severe corrosion damage in the machines, which in turn led to catastrophic and not infrequently fatal accidents. By the way, it was exactly because of accidents like these that regional steam boiler inspection associations, DÜV for short (the forerunner of TÜV), were founded in Germany. Besides regular maintenance and inspections, steam traps were also able to greatly reduce the number of accidents. This is where the British company Sanders, Rehders & Co. comes in. In 1888, Herman Sanders founded a small firm for merchants and sales agents. Back then, his focus wasn't yet on mechanical engineering components, but on importing goods from exotic countries like China and Japan. About two years later he found a new business partner in Mr. Rehders, who had good connections to German machine manufacturers. Gradually they realigned their business, started importing steam traps, and sold them successfully.

In 1906, the company presented the Sarco steam meter, the Sarco feed water meter, and similar measuring instruments for the first time - these carried the brand name but were probably made by suppliers. The name Sarco, by the way, is an abbreviation of the company name. The products quickly caught on, and the company kept growing. In 1907 it even opened its first international branch in New York and hired its first sales agents there. When imports from Germany were banned during World War I, the company had to set up its own manufacturing. In the US, business flourished, whereas the British division had a much harder time. They made it through the war years, albeit bumpily, but in April 1923 Sanders, Rehders & Co. had to be dissolved out of necessity. When they later tried to sell the US products in the United Kingdom, they had to find a new brand name. They finally settled on Spirax, because of the spiral-shaped tubes of the steam traps. Over time, these two business divisions formed today's Spirax-Sarco Engineering plc, which, thanks to cleverly chosen acquisitions, can offer not only world-leading solutions for controlling and managing steam, but also electric thermal solutions and innovative fluid path technologies. In total, it serves more than 110,000 customers worldwide across a wide range of industries - from food manufacturers to pharma companies to aerospace firms.

How could Spirax-Sarco Engineering develop in the future?

First, I'd like to briefly sum up the engineering company's business model once more. Spirax-Sarco Engineering is one of the world's leading companies in thermal energy management and niche pumps. Every day, more than 8,400 employees work on offering customers (mainly B2B) tailor-made solutions that lead to energy and water savings, lower emissions, higher process efficiency, and better product quality. To specialize better in the individual areas, the company divided its business into three divisions:

• Steam Specialties: This division generates about 56 percent of total revenue and, with its two subsidiaries Spirax Sarco and Gestra, takes care of innovative and efficient steam systems and related products. The equipment is used, for example, to sterilize pharmaceutical equipment or to produce food on an industrial scale.
• Electric Thermal Solutions: This division contributes 14 percent of total revenue and manages the two brands Chromalox and Thermocoax. Here they offer thermal energy management and control systems for more efficient industrial processes.
• Watson-Marlow: The Watson-Marlow Fluid Technology Group itself is made up of 10 individual companies, which together contribute about 30 percent of the group's total revenue. They supply fluid technology solutions such as pumps, tubing, and special filling systems, especially for biotech companies as well as for the food industry and chemical companies.

Now let's take a look at the figures from the most recently published half-year report (HY 2021 - ended June 30, 2021). In this half-year, the engineering company increased its total revenue by an impressive 13 percent over the prior-year period to GBP 643.7 million. Thanks to lower expenses, the company even managed to generate a profit of GBP 162.6 million - an increase of a fantastic 42 percent. No wonder, then, that earnings per share also rose from GBP 111.6 to GBP 157.6. These are truly excellent numbers that not many companies can show right now. But if you look at the stock chart, you quickly notice that Spirax-Sarco Engineering stock definitely isn't exactly cheap to buy at the moment.

Going forward, the company also wants to grow organically by offering its customers even better and more powerful product solutions. Apart from that, it has extraordinary pricing power. Since the equipment is built into important process steps, customers can't afford to cut corners there. A failure of such a device would burn through huge amounts of money. Furthermore, Spirax-Sarco Engineering has an excellent reputation in the industry, since it can draw on a wealth of experience and produces high-quality, high-performance equipment. To be able to offer new technologies and better geographic coverage in the coming years too, the company doesn't shy away from buying fitting acquisition candidates either. Here, too, it has proven its skill and foresight many times.

One trend Spirax-Sarco Engineering will surely benefit from over the long term is sustainability. With the steam expert's products, customers can significantly reduce their environmental impact while working more efficiently and safely at the same time. To give just two examples: the products customers bought in 2020 alone can save around 15.8 million tons of CO₂ and 78.6 million cubic meters of water every year. And since sustainability is moving more and more into the foreground, I'm also optimistic about Spirax-Sarco Engineering's revenue and profit growth.

What about the dividend?

The industrial group Spirax-Sarco Engineering has been paying a dividend to its shareholders since 1968. Except for 1990, when the dividend was left unchanged from the year before, the company has managed to pay and raise its payout year after year. That's a long winning streak to be truly proud of. Over the last 10 years, the average dividend growth rate is 11.1 percent. At 0.8 percent, the current dividend yield isn't particularly high, but with growth like that it's quite solid. And with a payout ratio of 44.2 percent, enough capital stays in the company to keep growing in the future.

Conclusion:
Early on, Spirax-Sarco Engineering was one of the pioneers in steam management and fluid path technologies. Today, as a market leader in many niche markets, it's extremely well positioned and can therefore keep not only its customers happy over the long term, but also its shareholders. So I can only recommend putting this stock on your watchlist or grabbing it when the opportunity arises.