Samuel Brannan made his fortune from California gold in the mid-19th century; John Sutter lost his shirt. Guess which one owned the land? Mr Brannan learned that selling picks and shovels to miners, as opposed to having the ground, made good business. Glasgow-based Weir Group has done something similar, concentrating on making pumps for the extractive industries. Until recently, profits had ballooned.
But third-quarter results on Tuesday underscored the complete reversal in oil and minerals, especially the former. Its oil and gas unit’s operating profits (roughly half of the group’s) shrank by two-thirds. The US unit, which provides pumping equipment for shale oil drilling, has suffered badly amid an efficiency drive among its client base. Orders in its oil division have evaporated, down 39 per cent.
The good news (in purely relative terms) came from the mining segment. Some original equipment orders in Latin America kept the decline in revenues to just single-digits. Orders in Weir’s higher margin after-market — spare parts and maintenance work — fell by a tenth in the past half-year, but that was after a very good period in 2014. And after-market revenues, which generate about 75 per cent of operating profits, did rise slightly. A market fatigued by bearish news from commodity-related companies reacted well: the shares rallied 6 per cent.
Yet the few glinting flakes that pan out in Weir’s report fade quickly with a study of its valuation. After a 50 per cent drop in its shares since the end of May, one might have expected to find that Weir shares are cheap. They are not. The pumpmaker trades at the middle of its 10-year price to estimated earnings range (14 times), as analysts keep chipping away at their estimates.
Cost cuts have enabled Weir keep its balance sheet in order and cover its dividend — unlike some miners and oil explorers. Despite this resilience, its shares have further to fall before they are cheap enough to attract attention.
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