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Are these big engineers a buy after today’s profit warnings?

Image: Senior. Fair use.

Shares in engineering firms Senior (LSE: SNR) and Keller Group (LSE: KLR) plunged by up to 25% this morning, after both companies issued profit warnings.

Unlike some peers who are benefitting from improved trading and the weaker pound, Senior and Keller are both facing soft conditions in key markets. An added risk is that debt levels are fairly high at both firms. In this article I’ll ask whether either of these stocks is worth buying at current levels. Is this the bottom, or do these stocks have further to fall?

Trouble with trucks

Reported revenue at aerospace and automotive manufacturer Senior rose by 7% to £682.2m during the first nine months of the year. However, this healthy-sounding performance was purely the result of exchange rate effects (+£48m) and acquisitions (+£26.1m).

The group’s underlying organic revenue fall by 4% during the same period. A modest increase of 2% from Senior’s aerospace division was wiped out by an 18% decline in revenue from the Flexonics division, which makes parts for heavy trucks.

Senior says that the outlook for the US heavy truck market is particularly poor. To combat this, the group is cutting costs and shifting production to lower-cost countries.

Turnaround potential?

However, the news wasn’t all bad. Senior says it’s “continuing to secure positions on new [vehicle] platforms” and ramping up its aerospace production programmes. This should mean that when market conditions improve, growth should take off once more.

I estimate that Senior’s shares now trade on a forecast P/E of about 12 and offer a prospective yield of 3.8%. This may seem attractive, but the risk is that while we wait for trading to improve, the group’s £222m net debt burden could force management to cut the dividend.

Although I expect Senior to make a good recovery at some point, the firm’s debt levels mean I won’t be buying just yet.

In a deep hole?

Groundworks specialist Keller said this morning that full-year underlying results are expected to be 15% below current forecasts. Lossmaking trading in Asia and poor market conditions in Canada and Africa are to blame, according to the firm.

Although I applaud Keller for being precise about the size of the likely shortfall, the news is disappointing. As I write, the shares are down by 26% at a 46-month low of 648p. After adjusting current consensus forecasts to reflect today’s 15% cut to guidance, I estimate that Keller shares now trade on a forecast P/E of about 8.5, with a prospective yield of 4.4%.

It’s tempting to see the stock as cheap, but I think there’s a risk that things could get worse. The group’s net debt was £339.7m at the end of June, which represented 2.1 times annualised cash profits (EBITDA). That’s fairly high, and I think today’s news suggests this multiple may now be higher.

I wouldn’t want to place too much confidence in Keller’s low valuation. As things stand, I believe the stock could be cheap for a reason. While I’m confident Keller will eventually recover, I plan to wait for the full-year figures before revisiting this stock.

A better opportunity?

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.