Tuesday 7th January 2014
I have sold short in Weir Group (WEIR, mkt cap £4.5bn), at 2,094p/shr.
According to Bloomberg estimates (BBE), WEIR’s top 13 customers* account for 32% of its revenue. Further, BBE suggest that these customers are set to cut their combined annual capex by 6.5%, 4.0% and 4.1% in 2014, 2015 and 2016. This is a total cut in capex of 14% over the next three years. By comparison, BBE forecast that WEIR is set to grow its revenues by 3.5%, 5.0% and 9.5% in 2014, 2015 and 2016. This is a total of 19% growth in revenues over the next three years.
I do not see how see how 19% revenue growth as compared to a 14% cut in capex by the top third of WEIR’s customers squares.
Further, forward EPS forecasts have recently been cut on the back of a profit warning in November. I suspect a further warning may be on its way, either prior to or in the group’s 2013 prelims scheduled for 26th February.
At 12.5x forward earnings, its rating still appears full.
I reckon the principal risk is a short squeeze as it’s somewhat crowded with short interest at what looks like c. 12%. But I doubt this will happen any time soon, considering that the downside looks to have only just begun.
*Bloomberg estimate of WEIR's revenue by customer - Glencore Xstrata (6.6%), RIO (3.9%), EDF (3.2%), CAN Natural Res (2.6%), BHP (2.5%), Royal Dutch SH (2.2%), Anglo American (2.2%), Exxon Mobil (2.0%), Southwestern Energy (1.9%), PPL Corp (1.5%), Freeport-McMoran (1.3%), Vale (1.0%), BP (0.9%).
And another thing ...
In terms of the chart, there is what appears to be a nasty bear flag formed over recent months, itself within a down channel. Further it decisively gapped down through its 200dma in early November and has failed to recover ... not an encouraging sign.
|WEIR consensus revenue growth and EBITDA margin forecasts|
as compared to consensus capex by top 13*(see above) customers
|Recent forward EPS downgrades following profit warning in early November|
|Forward P/E and EV/EBITDA rating|
|Chart suggesting possible bear flag formed in downward channel |
and decisively gapped through 200dma and failed to recover
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