Weir Group shares in–IMI’s out, but dig deeper…
Ken Odeluga September 2, 2014 10:34 PM
<p>Investors interested in FTSE 100-listed industrial engineers were today advised to switch affections from IMI Group Plc. to Weir Group Plc. The recommendation by an […]</p>
Investors interested in FTSE 100-listed industrial engineers were today advised to switch affections from IMI Group Plc. to Weir Group Plc.
The recommendation by an equity analyst at Credit Suisse to (essentially) buy Weir stock at the same time as the bank advised selling IMI appeared to have had an effect, at least on the surface.
Weir stock reached as high as 3.8% at one point earlier on Tuesday, whilst IMI’s fell as much as 2.3%.
Credit Suisse’s industrial machinery sector team, led by analyst Jonathan Hurn changed their overall rating on Weir to “outperform” from “neutral”.
They also lifted their stock price target for Weir shares to 3060p from 2540p.
The move, whilst not entirely analogous to an upgrade to ‘buy’ from ‘hold’, within the schema of Credit Suisse’s equity brokerage recommendations, is certainly the closest corollary to such advice.
At the same time, Hurn and his team changed their rating on IMI to “neutral” from “outperform”, whilst cutting their target price on that stock to 1500p from 1640p, essentially reducing their rating to ‘hold’ from ‘buy’.
“Weir end market exposure offers better chance for upside surprise. Our end market analysis suggests that 66% of Weir end markets could offer scope for positive surprise versus 0% for IMI,” Hurn said.
An additional implication to draw from the joint moves by the bank is the move is an adjustment of the weight it gives the two stocks, either ‘virtually’, in a model portfolio, or in terms of actual holdings in the shares.
Not an open and shut case
However, there more to this switch in favour by the bank within the UK industrial engineering sector than meets the eye immediately.
For instance, the bank’s team might or might not have taken into account such factors as capital expenditure cycle: Weir and IMI could be at differing stages in their mutual programmes requiring expenditures which may place front-loaded burdens on their financial performance and potentially obscure underlying strength.
Another point worth mentioning: mixed end markets. Obviously the industrial equipment sector will correlate closely with broader business investment cycles and will be highly cyclical in the historical sense. Case I point: Weir itself posted a very weak profit-before-tax result for the full-year of 2013, blaming oversupply in the energy equipment market. At the same time, it will have naturally created a much easier basis for its full-year results for this year. (Although its 2014 interim results in July already showed operating results were 7% below those of the first-half of 2013).
In IMI’s case, it announced a five-year plan to double full-year operating profit by 2019. That was at the beginning of last month when it reported a 6% fall in operating profits for its first half of £137m. It said it partly aimed to remedy this situation by means of acquisitions, potentially putting its current prospective net debt to equity ratio of 0.7 under pressure, whilst Weir’s trades on 1.4
But we can still muddy the water further, because both Weir and IMI have signalled they’re interested in making acquisitions soon, with Weir already having been rebuffed by Finnish rival Metso in May.
IMI trades on a P/E multiple of 15.7, below Weir’s 17.4, but still at higher than its ten-year average of 10.8.
Even so it’s IMI stock that is bearing the brunt of the pair’s joint acquisitive intentions with a new 52-week low today whilst rival Weir Group closed as the top of the FTSE 100 performer with a 2.5% gain.
Overall, it’s difficult to tell what extent Credit Suisse’s recommendation changes were predicated on considerations beyond the two engineering stocks, and which may be specific to each.
Consensus on the pair shows no clear trend
A glance at the trend of opinion by other major brokerages gives a less decisive picture than CS’s advice, with 11 of the 20 in total compiled by Thomson Reuters giving a ‘buy’ or ‘strong buy’ opinion and 2 saying ‘sell’ IMI.
For Weir, 3 of 20 said ‘sell’ whilst ‘9’ give ‘buy’ type ratings with 8 advising clients to ‘hold’.
On a short-term trading basis Weir just about edges it.
Its rapid advance today puts it clear of all classic simple moving averages and the signal line of its Moving Average Convergence Divergence (MACD) momentum gauge is above the zero threshold, denoting upside impetus.
IMI’s shares are well below all moving averages and whilst the signal line of the MACD looks to be set to cross above the price line soon, both remain below the zero threshold, suggesting downside momentum continues to hold sway, even if in the short term, IMI’s stock certainly looks less over-cooked than its rival’s.
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