Morgan Stanley upgrades Weir, Spirax to 'overweight'
By Michele Maatouk
Date: Monday 09 Dec 2024
(Sharecast News) - Morgan Stanley upgraded Weir Group and Spirax on Monday as it took a look at the European capital goods sector.
Spirax was upgraded from 'equalweight' and the price target cut to 8,500p from 9,000p.
The bank said Spirax has been through a considerable consensus downgrade cycle and since 1st January 2023 the 2025 consensus EBIT has declined by 25%.
Morgan Stanley noted that the share price has fallen 33% in that period.
"Reassuringly, since the start of September, and through the 3Q24 capital markets day and trading update, we have seen consensus stabilise," it said. "With some of Spirax's most profitable end markets set to recover in 2025, we see scope for Spirax to move from 20% margins in 2024, up to the 22-23% range."
Morgan Stanley also pointed out that biopharma news flow is starting to improve and said it expects a Watson Marlow recovery in 2025.
Biopharma is 18% of Spirax's group sales and has been through a considerable period of de-stocking, it said.
"This exposure sits in the Watson Marlow division, which achieved an average of 10% organic revenue growth per year in 2014-19, with EBITA margins more than 30%."
Morgan Stanley said that in 2023, organic sales growth declined by 18.5% in WM and margins fell to 23.8%, with one of the key headwinds being de-stocking in the Biopharma activities within Watson Marlow.
"We are now seeing more positive comments from some of the customer base in this end market, and also some of the companies, like Halma, that sell into this industry.
"This sets the stage for a recovery in 2025e for this division, and we expect these incremental sales to come back with significant operating leverage," it said.
Weir was upgraded from 'underweight' and the price target lifted to 2,560p from 2,080p.
Morgan Stanley said it considers Weir its preferred play within the European mining equipment segment.
"We see a favourable backdrop for Weir's Minerals division, supporting the stock's attractions as a growth compounder with an aftermarket business growing at a high-single digit rate per year," it said.
"Furthermore, we argue that management's delivery on its financial targets is not fairly reflected in the stock's valuation."
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