Are these FTSE 250 growth stocks getting too expensive?

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Spirax Sarco

Believe it or not, Spirax-Sarco (LSE: SPX) isn't the name of a Russian satellite, or even a character from the original Star Trek series, but in fact a UK-based multi-national industrial engineering group. I know what you're thinking - do we still do industrial engineering in this country?

Diversity

The answer is a resounding yes, and there is a global demand for it too. Despite the name, Spirax-Sarco Engineering comprises two world-leading engineering businesses: Spirax Sarco for steam and electrical thermal energy solutions, and Watson-Marlow for niche peristaltic pumps and associated fluid path technologies.

The Cheltenham-based group serves a wide range of industries, and benefits from a great diversity of end markets and customers. I see this as one of the core strengths of the business as it insulates it from much seasonal and cyclical demand. For example, in 2016 the company's largest industry segment, food, accounted for no more than 16% of sales and no single customer in any industry accounted for sales of greater than 1% of the group total.

Excellent balance

Spirax also has an excellent balance between higher-growth end markets and those that are less cyclical and more defensive in nature. Last year, around 50% of total revenues were derived from these defensive end markets, including food & beverage, pharmaceutical & biotechnology, healthcare, chemicals, buildings (heating, ventilation and air conditioning), water & wastewater, and power generation. The remaining 50% being derived from maintenance and repair sales, supported by end users' operational expenditure budgets.

Spirax has performed exceptionally well over the years through consistently rising earnings as well as an enviable 49-year record of dividend growth. Our friends in the City are expecting this to continue with an anticipated 21% rise in earnings for the current year to December, followed by a further 12% improvement in 2018.

But I'm getting increasingly concerned about the valuation. The share price has advanced 25% over the last 12 months, recording new highs earlier in the year, and leaving the shares trading on a high earnings multiple of 27 for 2017. I've no doubt the business will continue to grow, but now is not the best time to buy the shares, in my opinion.

Strong financial position

Another mid-cap firm that I believe is beginning to look rather expensive is Renishaw(LSE: RSW). The Gloucestershire-based group is one of the world's leading engineering and scientific technology companies, with expertise in precision measurement and healthcare.

Full-year results revealed record levels of revenue of £536.8m, with adjusted pre-tax profits of £109.1m, representing a 25% increase year-on-year. The group is in a strong financial position and continues to invest in the development of new products and applications, along with targeted investment in production and sales & marketing facilities around the world.

Again, I'm increasingly concerned about the business's valuation. The shares have continued to surge ahead this year, soaring 70% since January, leaving them trading on a lofty P/E rating of 32.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Renishaw. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.


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