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
*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
The information, discussions or topics referred to on this blog should in no
way be considered “advice” to buy or sell anything. The information which may
be referred to is freely available in the public domain and where required the
source of information is referenced to for verification. While every effort has
been made to ensure the veracity of any information contained within this blog,
the author accepts no responsibility for the accuracy of any information
contained within this blog or for the sources of information which may be
referred to. Readers are responsible for their own actions and interpretation
of the information contained within this blog.