LONDON -- Buoyant investor sentiment has seen global stock markets make a cracking start to 2013. Confidence that the global economy has finally turned the corner, and expectations of renewed central bank money printing, has prompted inflows across all stock classes.
However, I believe that signs of an improvement in the global turnaround remain tentative at best, with earnings pressure for many cyclical companies likely to persist for some time. With this in mind, I would warn against ploughing cash into industrial engineering turnaround specialist Melrose Industries (LSE:MRO), at least in the medium term.
Beware of stalling revenues
The Warwickshire-based firm warned in November's interim that its revenue growth had slowed in the July to mid-November period, which prompted a more cautious outlook for the current year.
On a constant currency basis, top-line growth slowed to 6% versus 10% during the first six months of 2012. The overall weekly order intake rate was 8% lower than in the first half, too.
Melrose continues to experience weakness across its businesses. The company's Lifting division, which accounts for 47% of group turnover, has seen both orders and revenues slow in recent months. The division's heavy industrial exposure offset stronger demand from the oil and gas markets.
Meanwhile, Melrose's Energy arm -- responsible for more than 40% of revenues -- is expected to suffer heavily from falling 'turbo-generator' turnover during 2013.
Analysts expect normalized earnings per share for 2012 -- results for which are due on Wednesday, March 6 -- to tumble more than 13% from 2011 levels, to 15.8 pence. This figure is expected to rise to 17.1 pence during 2013, still below 2011 levels, but further weakness in key markets could put even these forecasts to the sword.
Falling earnings are reflected in Melrose's projected dividend per share growth. A payout of 6.6 pence per share last year is set to rise more modestly to 7.6 pence and 8.4 pence for 2012 and 2013, according to broker estimates.
A dividend yield of 3.2% and 3.6% for 2012 and 2013 respectively remains healthy, but earnings pressure could put these payouts in jeopardy. Dividend cover of 2.08 and 2.04 for these years is down significantly from 2.93 for 2011.
And a P/E ratio of 15 for 2012, plus an earnings multiple of 13.8 for 2013, look too high given the faltering top-line growth and potential risks to the downside.
Engineer millions from the markets
Fallout from the patchy economic backdrop look set to stymie Melrose's growth prospects over the medium term. But that is not to say investors cannot generate massive profits from canny stock selection, and this FREE report from The Motley Fool explains how to make millions from the stock market. Click here to download the report while it remains free and available.
Fool contributor Royston Wild has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.