The world of industrial kit capital spend has been a tough space to be in for well over a year. One might wonder why the market is quite so shocked by the widespread sales declines at the start of the year for Spectris (SXS). Clearly not all investors have been caught off balance, as the shares have been weakening right through April, falling off £24.66 highs (2 April) following a spell trading in the £23-£25 range.
I won't re-hash the statement, you can read it here, but for me, the biggest worry is the size of the revenue decline from the Far East. A 15% first quarter sales slump is bigger than declines in the US (down 10%) and even Europe (minus 6%), the latter surprisingly robust it seems given the recessionary backcloth of many EU markets. Blaming tough comparatives this time last year looks a red herring, deferred orders cuts to the chase, even if Spectris remains optimistic that most are merely being delayed until later in the year, not written off to the scrap heap completely.
The Asia-Pacific region has been a growth engine for the UK £2.3 billion company for a while. In 2009 sales into the Asia-Pacific region totalled £227.8 million, by last year (2012) the equivalent figure was £392.8 million, and the company was breaking out income from individual markets like never before, showing Japan, China, South Korea separately from the rest of the regional revenues.
But now the contract sign-off delays are spreading beyond Europe and the US. This seems to have pulled the rug from under the feet of management too. In February, in its 2012 full year results, the company spelled out that it had being enjoying good demand from Asia Pacific, Japan and China in particular. 'We continue to see good opportunities in China across all of the businesses, particularly within the pharmaceuticals and discrete manufacturing segments.'
Investment in emerging markets, new products and acquisitions to bolster its strategic positioning was always a sensible move, one I wrote about in @SharesMag January '12 (here, page 13). Has this tactic run out of steam? Analysts don't seem to think so. Most are talking about 4%-6% cuts to existing 2013 forecasts, hardly a sign of a deeper malaise for Spectris. 'While we anticipated a deceleration in the first quarter, the slowdown was broader and deeper than expected,' say analysts at Investec today, 'although we have no reason to believe that the company is losing market share.'
It is assuming a 5% downward profits adjustment for this year, or pre-tax profits of £216 million. This would imply earnings per share (EPS) of about 138p-139p, putting the price/earnings (PE) multiple at 14. That's going to start looking pricey without evidence of order conversion improvement, upping the ante on half year results due in July.