Should I Buy Weir Group?

Published in Company Comment on 20 September 2012

Harvey Jones weighs up Weir Group (LSE: WEIR).

It's time to go shopping for shares again, but where to start? Consumer goods giant Reckitt Benckiser (LSE: RB)? Dividend behemoth Vodafone (LSE: VOD)? Or maybe global retailer Tesco (LSE: TSCO)?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy Weir Group (LSE: WEIR)?

Pump it up

Actually, I've been asking myself this question for a couple of years. I still haven't taken the plunge but, with hindsight, I've missed some great buying opportunities.

Weir Group is a Scottish success story. This Glasgow-based engineering company, which makes pumps, turbines and valves, is a truly global business, with markets in the US and Europe, Latin America and Asia-Pacific.

It employs 8,000 people across three core sectors: minerals, oil and gas, as well as power and industrial. When people lazily claim the UK doesn't make anything these days, they forget companies like Weir.

Here Weir go

Investors in the company have been on a roller-coaster ride this year. In late February, shares hit a high of £22.30. By June, they had slumped more than one-third to around £14.30.

Anybody who bought then (as I nearly did) will be celebrating, with the shares now standing at £18.25. So why all the excitement? In July, it was briefly the most heavily shorted stock in the FTSE 100, following a slide in demand for equipment from the US "fracking" industry, after the shale gas revolution led to a glut of supply, forcing down prices.

Weir, which provides half of all the high-pressure pumps used in the US and Canadian shale markets, had £46 million of forward orders cancelled, hitting first-half profits in its oil and gas division.

But this only underlines the benefits of having a well-diversified business, as its minerals and power & industrial divisions offset the bad news, with orders growing 7% and 11% respectively.

Weir reported a healthy 27% rise in first-half profits, with revenues increasing to £1.3 billion, up from £1 billion in the first six months of 2011. Few are shorting it now.

Anyone for afters?

One worry is that Weir is exposed to any downturn in the mining industry. If we do get a Chinese hard landing, the aftershocks will hit mining capital expenditure, and demand for Weir's equipment. Emerging market uncertainty also explains Weir's recent volatility.

That said, Weir does have a cushion, in the shape of its strong aftermarket. The more equipment it installs, the more it earns from replacement parts and service contracts. Just ask turbine maker Rolls-Royce (LSE: RR).

Weir Groupie

Weir Group yields just 1.8%, so it isn't for income seekers. It is trading on a forecast price-to-earnings of 12.2 times earnings, much lower than in 2010, the year it was promoted to the FTSE 100, when it hit a high of 17.7.

The stock is still 18% below its 52-week high. If we get another bout of stock market turbulence, recent history suggests Weir Group will be unfairly knocked. If it is, I plan to pump some of this stock into my portfolio. I don't want to squander this opportunity again.

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> Harvey doesn't own any shares mentioned in this article. The Motley Fool has recommended shares in Weir Group.

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goodlifer 20 Sep 2012 , 11:18am

Looks like a good company, but still a bit pricey.
I wouldn't pay more than about 1,500p.

vinchainsaw 20 Sep 2012 , 12:31pm

1500 would be a go price for me too.
Would put it on a PE of 10, all things being equal.

WS Atkins on a PE of 9 though...

I would like a piece of Weir. At the right price of course.

KeyLifeSkills 20 Sep 2012 , 1:32pm

It's a very good company. I was fortunate to buy earlier this year at £14.84. Given market conditions, I hope to start taking profits around £19.00.

merchantprince00 20 Sep 2012 , 5:44pm

I asked myself the same question back in April when the shares were 1652p and certainly think they are capable of growth through their gearing to the commodities industries.

They have certainly been volatile in line with global ebbs and flows in confidence over future demand.
At the time I also compared its strategy to Aerospace and hold R-R and GE in my portfolio.
As well as fracking the company has also suffered in its energy division following Fukushima and resulting perception of nuclear.

Biggest issue is how much growth is coming from an aggressive acquisition program (which costs money).
The company is also running with a cashflow figure lower than declared profits.
And the amount of intangibles (from acquisitions??), on the balance sheet is also a concern and excluding them leaves a negative net asset figure!

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