Digitalization And Stricter Regulation Will Hurt Legacy Steam But Enable Modest Digital Wins

Key Takeaways

• Heavy reliance on legacy steam technologies and slow diversification expose Spirax Group to market share loss as customers shift toward digital and energy-efficient alternatives.
  
• Rising regulatory, geopolitical, and supply chain pressures threaten earnings reliability, increase costs, and limit revenue and margin growth prospects.
  
• Strategic investments in digitalization, decarbonization, and diversification are driving resilient, higher-margin growth and reducing risk across regions and industries.

Catalysts

Provides thermal energy and fluid technology solutions in Europe, the Middle East, Africa, the Asia Pacific, and the Americas.

• The accelerating adoption of automation and digitalization in global manufacturing poses a long-term risk to Spirax's core steam and thermal businesses, as customers could bypass traditional systems in favor of new, more advanced alternatives, eroding the company's addressable market and putting sustained pressure on revenue growth.
  
• Shifting global regulatory regimes around energy consumption and decarbonization may increase the cost burden for Spirax Group's industrial customers and lead to decreasing demand for steam-based solutions, driving higher compliance costs for Spirax, reduced customer CapEx willingness, and ultimately constraining revenue and margin expansion.
  
• Spirax's growth remains heavily reliant on traditional steam and thermal technologies, with limited demonstrated ability to rapidly diversify into innovative, digital, or data-driven business models. This lack of agility risks significant loss of market share and persistent net margin erosion as industry standards shift and more integrated, outcome-based competitors gain ground.
  
• Emerging deglobalization and geopolitical tensions are triggering supply chain disruptions and trade barriers, already evident in market instability in China and Korea, and are set to increase costs, delay project execution, and decrease global sales growth potential, threatening earnings reliability and lowering operating leverage.
  
• Industrial customers face an accelerating transition to electrified or alternative heating technologies, supported by tightening environmental regulations and growing pressure to shift away from legacy steam. As customers reduce investment in steam systems in favor of more energy-efficient solutions, Spirax's long-term revenue trajectory and profit margins are at growing risk of structural decline despite ongoing operational improvements.

Spirax Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Spirax Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Spirax Group's revenue will grow by 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.5% today to 12.2% in 3 years time.
• The bearish analysts expect earnings to reach £225.4 million (and earnings per share of £3.23) by about July 2028, up from £191.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.2x on those 2028 earnings, up from 23.9x today. This future PE is greater than the current PE for the GB Machinery industry at 21.7x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

Spirax Group Future Earnings Per Share Growth

Risks

• Spirax Group is well positioned to benefit from global secular trends such as industrial automation, digitalization, and decarbonization, which are expected to drive sustained demand for its engineered solutions, potentially supporting revenue and profit growth.
  
• The Group demonstrated consistent organic growth ahead of industrial production (IP) in 2024, with all three business units delivering positive organic sales and margins, and management indicating confidence in outperforming IP in the future, which could boost long-term earnings.
  
• Strategic investments in digital customer connections, decarbonization technology, and recurring aftermarket/service offerings are increasing Spirax's addressable market and building higher-margin, resilient revenue streams that enhance net margins.
  
• Spirax's ongoing geographic and sector diversification, including strong growth in the Americas and targeted expansion in process industries and life sciences, reduces reliance on any single region or sector and mitigates the risk of prolonged revenue stagnation.
  
• Operational restructuring, ERP-led efficiency improvements, and a clear capital allocation strategy (with medium-term targets of 22%–23% operating profit margins and progressive dividends) support sustained improvements in margins and returns to shareholders, which could positively impact the share price over time.

Valuation

• The assumed bearish price target for Spirax Group is £57.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Spirax Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £91.0, and the most bearish reporting a price target of just £57.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £1.9 billion, earnings will come to £225.4 million, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of £62.0, the bearish analyst price target of £57.5 is 7.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.