Shares in FTSE 250 Dividend Aristocrat Spectris (LSE:SXS) have fallen 29% over the last month. As a result, the stock is trading at some of its lowest multiples in the last 10 years.
Furthermore, the issues it has been facing look like short-term ones. So should investors seize a once-in-a-decade passive income opportunity?
A quality operation
Spectris has a lot of qualities that make it attractive. The first is it operates in a highly technical industry, which creates a barrier to entry for potential competitors.
In addition, the end markets it sells into – automotive, aerospace, and technology – look set to grow over the long term. This should mean sales and profits keep moving higher over time.
The firm has also looked to grow through acquisitions. This can lead to a rising share count, but (encouragingly) the number of shares outstanding has actually declined over the last 10 years.
Spectris shares outstanding 2015-2025
Created at TradingView
During that time, Spectris has increased its dividend by an average of around 5.5% per year. So passive income investors should probably at least have the stock on their radars.
What’s been going wrong?
Given this, it might be surprising to see the stock trading at its lowest price-to-book (P/B) multiple in the last 10 years. Especially when the problems facing the business look like short-term ones.
Spectris P/B ratio 2015-2025
Created at TradingView
Spectris has had two major issues to contend with. The first is that a new payment processing system has caused sales from the first half of 2024 to be delayed.
While this might make revenues drop, management expects all of the lost revenues from the first half of the year to be recovered in the second. So I don’t think this is a reason to avoid the stock.
The bigger issue is China, where demand has fallen away sharply. This is the company’s second-largest market, so investors need to think carefully about the implications of this.
How to think about China
In terms of revenues, Spectris is reasonably well-diversified geographically. In 2023 (the last complete year), only around 17% of sales came from China.
That makes a 29% drop in the stock look like an overreaction – even if revenues from China went to zero, the effect on group sales couldn’t be a 29% decline. But the situation is more complicated than this.
In its annual report, Spectris provides a breakdown of revenues by geography, but it doesn’t do this for profits. And I think it’s highly unlikely that margins are the same across all regions.
That makes it difficult to assess the potential impact of China’s underperforming economy on the firm’s earnings. This means the risk is almost impossible to quantify accurately.
A once-in-a-decade opportunity?
Spectris is a Dividend Aristocrat and this hasn’t come about by luck. Furthermore, while the stock is trading at an unusually low multiple, the underlying business doesn’t look to be in terminal decline.
In fact, management is expecting operating margins to grow from 13% to 20% over time. If this happens, the current share price will look like a bargain.
Without a breakdown of profits by geography, though, the risk of slowing demand from China is very difficult to quantify accurately. As a result, I think there are better opportunities at the moment.
This post was originally published on Motley Fool
