VALUE INVESTING
Value In AMEC

By Stephen Bland (TMFPyad)
July 14, 2000

This week I continue the series on general value shares, which do not necessarily satisfy my own particular set of very deep value criteria but which nevertheless display strong value features that may interest many investors following the approach.

AMEC (LSE: AMEC) is another construction company, following my look at John Laing (LSE: LNGO) last week. It is no accident that another company in the same sector has been caught in my value trawl, because that whole area of the market has been depressed for some time, despite what appear to be rising EPS forecasts for many shares in this industry. As far as I know, AMEC is involved almost wholly in the heavy macho end of the industry such as major civil engineering projects, where a man can really let his butt hang out of his pants, rather than the limp-wristed housebuilding in which many of their competitors indulge to varying extents.

Here is the arithmetical profile:

• Share price 189p
• High/low this year 262/145
• High/low last five years 279/88
• Capitalisation £407m
• Earnings per share year ending 31/12/99 (normalised) 20.4p
• Forecast earnings per share year ending 31/12/00 (consensus) 25.0p
• Forecast earnings per share year ending 31/12/01 consensus 27.3p
• Price to earnings (P/E) ratio historical 9.3; on 00 forecast 7.6; on 01 forecast 6.9
• Yield on historical dividend of 7.5p, 4.0%; on 00 forecast of 8.2p, 4.3%
• Price to book value (P/BV) 3.7
• Gearing negative 41%, i.e. net cash
• One-year Relative Strength -32.1% (i.e. negative)
• Directors own only 0.15% of the equity
• Institutions hold 40.8% of the equity.

Almost a pyad share except for the high P/BV ratio which rules it out for that status. By chance a few years ago it was exactly that, and I made a little money out of it.

The relative weakness over the last year is always welcome as an additional, though not fundamental, value indicator.

Unusually for a company in the construction industry, AMEC has a fine record of increasing earnings per share over the last few years. The normalised EPS rises unbroken from 5.4p in 1995 to 20.4p in 1999 and this is extrapolated into the forecasts shown. This growth, without dips, is not common in an industry that more than most is very highly cyclical. This I find very encouraging and it suggests that someone in the company is doing something pretty right. My usual warning on forecasts applies, of course. One year is chancy, two years requires a sackful of salt.

Further encouragement for my view comes from comparing turnover with EPS. Over this five-year period, turnover has been more or less static whilst EPS has risen by the figures I show. A great achievement, indicating that the company has been selecting increasingly profitable work, not an easy thing to do in the highly competitive and high risk construction industry.

Normally I don't give a toss about "management" when selecting shares. I know a lot of people set great store by assessing this nebulous quality, and for some it is almost their primary criterion for choosing an investment. Possibly just because so many investors find it important, in general as a value investor I disregard it. As an outsider I have no real way of measuring it anyway and I don't see how others can.

In fact provided the company is sound, which my filters help me identify, a few clowns in charge helps depress the share price. Chances are that it will be turned round, enabling some serious wallet filler to be made. And another point on this; I have seen too many companies that allegedly had good management go wrong, producing generous helpings of negative wallet filler for the poor old mug punter small investors. Never trust a company that its protagonists claim has "good management." Put not your faith in people, only in assets, money, numbers; real stuff like that.

Directors' comments must always be studied if possible when considering an investment. This doesn't mean that you simply swallow everything they say, it means you learn directorspeak and translate it into English. I don't have the full accounts of the company but the chairman commented at the AGM on 11 May 2000 that:

"AMEC is in its best ever shape and we have every confidence that we will fulfil our obligations to shareholders in 2000 and beyond."

Very encouraging. It can always go wrong of course, but in fact few chairmen make such happy noises without good reason.

For those that have a penchant for such things, the company has announced some techie bullshit about a B2B (sorry for the awful jargon) venture with other international companies to form an Internet "portal", whatever the hell that is. In fact, this news was almost enough for me not to write about them at all, but I was overcome by their terrific record, forecast EPS rise of 23% and general low rating.

Other recent news, real stuff not technobabble, includes the contract to build the A13 road in East London, worth £200m.

In conclusion, despite my weak reservations about the imminent future of construction, I find this company highly attractive as a value play. But be warned, construction is a higher risk industry than some others. One major contract going wrong could cream the share price. Having said that, though, I have played such shares successfully many times in the past.

Where Next?

• AMEC discussion board
• What is a pyad share?