Interactive Investor

Brokers dub engineer’s fall a ‘great opportunity’

31st August 2021 15:47

Graeme Evans from interactive investor

Our stocks writer considers the merits of Weir Group following a slide in its share price.

Weir Group (LSE:WEIR) isn't going unnoticed from the FTSE 100 index after a City broker today said recent share price weakness had created a “great opportunity” in a market-leading asset.

Peel Hunt's backing for the mining services engineer helped shares to rally as much as 3% during the last session before FTSE Russell determines the stocks that will make up the FTSE 100 index and FTSE 250 index from 20 September.

Weir Group and ITV (LSE:ITV) are most in danger of relegation once the reshuffle outcome is confirmed on Wednesday evening, with Just Eat (LSE:JET) also set to make way after its incorporation in the Netherlands made it ineligible for the FTSE UK Index Series.

Weir was only promoted to the top flight in March, but the Glasgow-based company has slipped back in value to £4.5 billion after a 14% fall for its shares in the past six months.

They were trading at 1,711p this afternoon, but Peel Hunt believes they should be at 2,250p after highlighting a “buy” recommendation in a note headed: “Quality at a low price”.

Weir last year sold its Texas-based oil and gas division to Caterpillar (NYSE:CAT), part of a drive that has put climate change at the heart of its strategy by helping to produce the world's essential metals more sustainably and efficiently.

The company's technology already processes the majority of the world's mined copper, with the metal seen as central to enabling the world's low-carbon transition.

It used proceeds from the oil and gas sale to reduce debt and invest in future growth opportunities.

Peel Hunt said Weir's substantial aftermarket sales, premium margins and robust balance sheet made its current price multiple of 16.9 times earnings look favourable in comparison with other UK-listed industrial peers. It noted that Hill & Smith (LSE:HILS), Rotork (LSE:ROR) and Spectris (LSE:SXS) are on 21.2x, 23.5x and 21.8x respectively.

Peer parity results in the current price target for Weir, with more to come should it make the next step up in margins to within a target range for minerals of between 17% and 20%.

The broker said: “We believe recent share price weakness provides a great opportunity in a market-leading asset. We recognise sensitivity to raw material price movements, but Weir is a production-related business whose consistency is demonstrated by its track record.”

Weir's recent half-year results showed 2% growth in adjusted earnings to 35p a share alongside a resumed dividend of 11.5p, which chief executive Jon Stanton said reflected confidence in the new strategy and future prospects.

He added last month that demand for clean energy metals was creating a “multi-decade growth opportunity” for the business as the mining industry invests in expanding capacity at the same time as looking to reduce its environmental impact.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.