A Double Play on Commodity Rebound
06/24/2009 10:48 am EST
UK pumps-and-valves specialist Weir is a discounted play on the next extraction boom, writes Peter Shearlock in The IRS Report.
Among suppliers to the oil and mining industries, there are not many that straddle both areas. One that does is The Weir Group (LSE: WEIR), which is essentially a pumps and valves business. Its shares lost two-thirds of their value over the course of last autumn when the price of leading commodities was in free fall. There has been some recovery since but, as one of Britain's best-run companies, Weir remains cheaply rated.
Weir amounts to a play on both oil and base metals. More than half of last year's £1.44 billion of revenues came from its minerals division, whose biggest customer segment is the mining industry. But sales to the oil sands industry are included in the same division, as are Weir's flue gas desulphurization businesses. A separate oil and gas division accounts for 21% of total sales. The remainder comes from the power and industrial division, selling specialist pumps to power generators, nuclear included.
Weir turned in a blistering performance in 2008 with profits before tax up by more than a half to £176 million and earnings up just slightly less to 59.3 pence a share. It started this year with what was described as a “significantly stronger” order book than a year earlier. In March it warned that it was beginning to see a downturn in activity in the minerals division. But when it came to report on the first quarter last month, the tone was markedly more positive.
Clearly, the business is pretty sensitive to capital spending levels in the oil and mining industries. But, for all that, half of revenues come from the sale of spares and services. That provides a buffer against tough times, though it will not prevent profits from falling this year, as the company itself has indicated.
The range of market expectations for 2009 [earnings] is a wide one—between £140 million and £169 million. But, even at the lower end of that range, earnings per share would still come out at around 47 pence, leaving the shares selling for under 11x earnings. That is not a very demanding rating for a company with a terrific profit record. [The stock closed at 457 pence in London Tuesday, for a price/earnings ratio of 9.7 based on projected earnings of 47 pence a share—Editor.]
The rating also makes little allowance for the prospects of recovery. If we see a sustained up turn in the price of oil and a continuing recovery in base metals, this will eventually feed through to new investment by resource companies.
Weir has a strong balance sheet with net debt of just £240 million and total credit facilities of £625 million, which do not expire for another two years. Last year's dividend was lifted 12% and the shares currently yield 3.6%. Even on a worst-case scenario for 2009 earnings, the dividend would be two and a half times covered.