Uncertainty Makes an Unwelcome Return

The Week: Morningstar columnist Rodney Hobson looks at Spirax-Sarco, easyJet, and Johnson Matthey, all of which have uncertain outlooks

Rodney Hobson 20 November, 2020 | 8:59AM
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The Week

Shareholders in specialist engineer Spirax-Sarco (SPX) can be forgiven for wondering what all the Covid-19 fuss is about. The shares admittedly did fall from £9.40 to £7.70 in the stock market spring slump but they have since risen steadily to a peak of £11.90.

Trading, according to the maker of pumps and thermal energy equipment, has been resilient. But has it been so resilient that the substantial outperformance of the general stock market is justified? You wouldn’t think so from the latest trading update.

Although there was some improvement in the four months to October 31, industrial production was down 4% in the third quarter after a 12% contraction in the previous three months. Ominously, after a promising performance in June and July, the rate of growth slowed in August and September as industrial activity began to approach pre-coronavirus levels.

All production facilities remain open and operating within capacity so any shortfall is down to lack of demand.

In steam specialities and electric thermals, sales are still down organically, even if the rate of decline has improved. Only in fluid technology, which serves the biopharmaceutical and medical device markets, is life back to normal thanks to customers working on vaccines.

For good measure, the strength of sterling against a basket of currencies used by Spirax is having an adverse effect on sales and operating profit. At current rates, figures will be down 2-4%.

With more lockdowns coming into effect in Europe, the outlook remains uncertain. A correction to the share price was overdue. Further slippage is quite likely.

Flying on Hot Air

If being prime minister proves too onerous for Boris Johnson he can always get a job writing results announcements for budget airline easyJet (EZJ). Full year figures were surrounded with a lot of flannel rather than a grasp of the serious issues facing aviation today.

You could easily swap the airline’s “unmatched network, leaner cost base, most trusted brand and strong liquidity” with the PM’s “world beating”. Which one said: “We responded robustly and decisively, launching the largest restructuring programme in our history”? How about: “an unparalleled foundation upon which to emerge strongly from the crisis”.

EasyJet is still flying at only 20% of planned capacity, which is probably too much despite the assurance that "we know our customers want to fly with us and underlying demand is strong.” Not yet it isn’t. The Covid-19 vaccines are still some way off eradicating the disease and international flights will take even longer to recover.

Passenger numbers were halved in the year to September 30, pre-tax profits of £427 million last year swung to an £835 million loss and the dividend is scrapped. Heaven knows when it will be restored.

The shares rapidly fell by two-thirds in the February-March crash and have struggled to recover after finding a floor at 500p. That floor could well be tested again soon.

Still No Guidance

You have to wade through five chunky bullish paragraphs before you reach the pretty awful figures from specialist metals group Johnson Matthey (JMAT).

There is a dividend and the immediate future is more promising but I never like the feeling that management is trying to hide the grim reality. There is still no guidance for the second half to March 31.

It took a while for the underlying message to sink in and the shares actually gained ground at first but they ended the day down 5.6%. I hold but cannot in all honesty recommend buying in at this stage.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.