LONDON -- Shares in Weir Group (LSE:WEIR) have heavily retreated over recent days as fresh eurozone worries have whacked investor confidence, the firm's stock scaling back from the all-time peak of 2,474 pence hit last week.
However, I believe that the specialist pump and valve manufacturer could be set to experience negative earnings pressure in the near term, as difficulties in its key minerals and oil and gas markets could weigh on demand for Weir's products and services.
Rising aftermarket helps to drive revenues
Weir's full-year results release last month showed group revenues rise 11% to £5.5 billion, which in turn helped to drive 2012 pre-tax profit 12% higher to £443 million.
The company's commitment to margin expansion also helped to boost an improving bottom line. Weir saw groupwide margins improve by 110 basis points in 2012 to 19.1%, prompted by a healthy lift in aftermarket revenues -- these rose to 57% of total orders last year from 52% the year before. Indeed, lucrative after-sales activity should underpin the group's strength over the long term.
Falling orders paint worrying outlook
However, I believe that weakness in its key minerals and oil and gas divisions could put a pressure on the top line in the meantime. Group order input slipped 2% in 2012 to £2.4 billion, and 9% on a like-for-like basis, due to lower input from original equipment manufacturers in the second half of the year.
City analysts expect earnings per share to edge just 3% higher in 2013 to 154 pence, before picking up the pace to post 9% growth in 2014 to 168 pence.
Weir Group currently carries a P/E rating of 14.2 and 13 for 2013 and 2014 respectively, bang in line with the prospective earnings multiple of 14.2 for the entire industrial engineering sector.
Under-par dividends expected to last
The firm is committed to building a lucrative dividend policy, and last year's 38 pence payout was up 15.2% from 2011. And forecasters expect this to come in at 41.1 pence in 2013, an 8.2% increase. This is then expected to rise 9.5% next year to 45 pence.
These payments are also well protected with coverage of 3.7 times expected through to end-2014, well above the safety watermark of 2. However, these payments provide yields well below the 3.5% FTSE 100 average, with 2013 and 2014 yields predicted at 1.8% and 2%, respectively.
Given the threat of deteriorating end markets on Weir's earnings prospects, combined with the lack of a meaty dividend, I believe that the engineering play lacks a compelling investment case at the current time.
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