Tuesday, 7 January 2014

WEIR (WEIR) ... demand driven short

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
Source: Bloomberg
Recent forward EPS downgrades following profit warning in early November
Source: Bloomberg
Forward P/E and EV/EBITDA rating
Source: Bloomberg
Chart suggesting possible bear flag formed in downward channel
and decisively gapped through 200dma and failed to recover
Source: Bloomberg 
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