Do today's results make this stock the best in its sector?
Today's first half results from Spirax-Sarco(LSE: SPX) show that the industrial engineering company is making excellent progress. Its organic sales rose by 5% and adjusted operating profit increased by 18%. This was due to an adjusted operating margin increase of 1.9% which was aided by growth in both the Steam Specialties and Watson-Marlow businesses.
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The result was recorded against flat global industrial production growth rates and, despite challenging conditions, Spirax-Sarco has been able to grow organic sales across all divisions of the Steam Specialties business. This has allowed it to increase interim dividends by 8% so that the company now yields 1.7%.
Looking ahead, Spirax-Sarco is expected to benefit from weaker sterling as well as its £3.9m acquisition of Brazilian valve manufacturer Hiter (also announced today). Still, its shares look expensive since they trade on a price-to-earnings (P/E) ratio of 27 and with the company's bottom line forecast to rise by just 6% next year, it may be prudent for investors to take a look at other stocks within the industrial sector.
Bid opportunity?
One such company is Rolls-Royce(LSE: RR). It's currently in the midst of a major turnaround following a challenging period that has seen its profits fall significantly. In fact, Rolls-Royce's earnings are expected to have fallen by 61% between 2013 and 2016. But with a new management team and a strategy to boost the company's sales and profitability, Rolls-Royce is due to return to growth next year with its bottom line expected to increase by 35%.
This puts it on a forward P/E ratio of 22, which is acceptable given its growth prospects but is hardly cheap. Despite this, it seems to be a stock worth buying for the long haul since it has a wide economic moat and a dominant position in a number of key markets. Clearly, volatility is likely due to its uncertain outlook, but it remains a realistic bid opportunity with sterling continuing to weaken.
Lower risk
However, when it comes to the most appealing industrial play at the present time, BAE(LSE: BA) ranks as my top choice. Its shares trade on a P/E ratio of just 13.5 and yield 4% versus only 1.6% for Rolls-Royce. Furthermore, BAE is set to benefit from an improving outlook for the wider defence sector and its earnings are due to rise by 8% next year. This has the potential to positively catalyse its bottom line and allow it to record further capital gains following its 12% rise over the last year.
As well as being cheaper and better-yielding than Rolls-Royce, BAE is also less risky. It has a stable business model and isn't mid-way through a major transformation plan. Therefore, its risk profile is lower and this means that a narrower margin of safety is required to merit investment. So while Rolls-Royce is a strong buy, BAE seems to be the best industrial sector company on offer for now.
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Peter Stephens owns shares of BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
