Turkey of the week: take profits on this pump maker

By Paul Hill Feb 05, 2010

Paul Hill

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Since hitting a low of 272p in December 2008, shares in Weir – the world's biggest maker of pumps for transporting basic minerals, oil and sea water – have sky-rocketed 180%. But is this purple patch sustainable?

At a pre-close trading statement in January, chief executive Keith Cochrane said the firm will report 2009 adjusted pre-tax profits of £185m (5% above previous guidance) after a strong close to the year. Most of that increase was down to cost cutting and the group's exposure to the more resilient aftermarket (50% of sales) for maintaining, replacing and refurbishing worn-out equipment. The rest was down to favourable currency movements (90% of sales are outside Britain and 50% of those in dollars).

There was also a robust fourth-quarter performance in 2009 at its SPM division, which makes high-pressure pumps for the oil and gas industry. SPM's sales have benefited from the recent uptick in American drilling – its products help stimulate extra output from mature fields, which enhances recovery rates and can extend a well's economic life.

Weir Group (LSE: WEIR), rated a BUY by KBC Peel Hunt

So why is it time to take profits? The City is forecasting 2010 turnover and underlying EPS of £1.3bn and 52p, rising to £1.4bn and 60p in 2011. The stock trades on stretched p/e ratios of 15.3 and 12.8, while only paying a modest 2.5% dividend. So it looks expensive, given the firm is in essence a cyclical play on the health of the commodities market. If China's red-hot consumption wanes – as the country's rampant infrastructure spending fades – a host of firms could suffer. And that includes some of Weir's major customers, such as BHP, Anglo American and Rio Tinto.

Furthermore, the board admits that the future is challenging. A "lower opening backlog and uncertainty over the recovery mean it remains too early to call any significant upside to the 2010 outlook". The firm's 18% year-on-year decline in orders for the final quarter of 2009 helps explain the cautious tone. So I rate the stock on an earnings before interest, tax and amortisation (Ebita) multiple of ten. After adjusting for the estimated £200m in net debt and the £63m pension deficit, that generates a price of about 600p per share, 20% below current levels.

Sure, emerging markets will be the engine of the world economy for the next couple of years, but with Weir's fortunes so heavily tied to the volatile commodity and oil and gas sectors (which comprise 80% of sales), now is not the time to buy.

Recommendation: TAKE PROFITS at 797p

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

Published in Tips & advice | More articles by Paul Hill

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