Back in 2021, shares in Spirax Group (LSE:SPX) traded at a price-to-earnings (P/E) multiple of 61. Since then, the FTSE 100 stock has fallen 59% and trades at a P/E ratio of 26.

On the face of it, the company is dealing with cyclical pressures that should ease. But that doesn’t tell the full story.

Slow growth

It’s probably fair to say investors who were buying Spirax shares at a P/E multiple of 61 were hoping for better than 2% earnings growth per year. But a few things have gone wrong. 

Most obviously, the rate of industrial growth has slowed around the world. As a thermal energy business, the company’s sales and profits naturally fluctuate with global industrial production.

Spirax Group revenues 2019-24

Created at TradingView

When this boomed at the end of Covid-19, Spirax did very well. Since then though, weaker demand – especially in China – means revenue growth has slowed.

There isn’t much the firm can do to influence the macroeconomic environment, which is a risk. But it’s arguably not the biggest problem the company has been dealing with.

Margins

On the face of it, Spirax has wasted a lot of money over the last few years. The company has spent around £620m on acquisitions and its net income is £25m higher than it was in 2019.

This is because operating margins have contracted significantly. In 2021, these were around 24%, but they’ve fallen to just under 17%. 

Spirax Group operating margin 2019-24

Created at TradingView

That’s a sign the company’s acquisitions haven’t had the effect management might have hoped. And the slow growth has caused the P/E multiple to contract significantly. 

Investors might see this as an illustration of the risks of attempting to grow by acquisition. For Spirax, higher costs have combined with a cyclical downturn to weigh on profits.

Outlook

A P/E ratio of 26 is high for a FTSE 100 stock, but it’s towards the lower end of where Spirax’s shares have traded over the last 10 years. And that makes things interesting for investors.

It means the stock is trading at an unusually low P/E ratio and that multiple is based on what might be cyclically low earnings. That could give investors plenty of room for optimism. 

Spirax Group P/E ratio 2014-24

Created at TradingView

The latest signs from Spirax are somewhat mixed though. Its most recent update told us of a 3% decline in sales, but important signs of improving margins. 

At the moment, the biggest challenge remains weak demand in China. But management expects profits to continue growing in the next six months, driven mostly by lower costs. 

Should I buy the stock?

In my view, the fact that Spirax shares are down 35% this year says more about where they were than where they are now. The firm is facing cyclical challenges, but these are to be expected.

I fully expect the macroeconomic environment to improve and I expect this to bring a recovery in the company’s earnings. But at a P/E multiple of 26, I think a lot of this is still priced in.

I’m going to keep the stock on my watch list. It’s fallen a long way, but I see that as reflective of excessively high levels in the past, rather than an obvious bargain now.