Weir Group Poised To Benefit As Natural Resource Companies Get Back To Work

Weir Group (OTCPK:WEGRY) (WEIR.LN) hasn't been badly treated over the past year. As investors have shown renewed enthusiasm for companies leveraged to both oil/gas and mining equipment, Weir Group shares have risen more than 50% - keeping good company with the likes of Metso (OTCQX:MXCYY), FLSmidth (OTCPK:FLIDY), Atlas Copco (OTCPK:ATLKY), and Sandvik (OTCPK:SDVKY). Margins are only just starting to recover, though, and it remains to be seen just how strong the recovery in natural resources capex will be. What's more, Weir Group has issues to address in its seemingly perennially disappointing Flow Control business.

Valuation seems quite healthy, if not generous. Even if I assume that Weir regains its prior peak revenue in 2019, grows in line with historical norms for natural resource capex growth (that is, before the "super-cycle"), and reaches/holds double-digit FCF margins (something it's never done before), I can't get to a compelling DCF-based fair value. On the flip side, if the company can generate three to five years of mid-teens EBITDA growth on the back of this recovery, a fair value 5% to 10% above today's price is arguably in play. Investors considering these shares should consider the London-listed shares if possible, as they offer considerably better liquidity than the ADRs.

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Weir Group Poised To Benefit As Natural Resource Companies Get Back To Work