I’m out shopping for shares again. Should I add Amec (LSE: AMEC) to my wish list?
Amec powers up
I’ve sometimes felt that markets undervalue energy and engineering consultancy Amec. Last time I looked at the company, in February, it had just posted an 8% rise in full-year profits to £336 million, only to see 6% unfairly knocked off its share price in little over an hour. Yet there is plenty to like about the company, including share buybacks, a successful acquisition programme, strong cash flows, rising gas and oil revenues, and a progressive dividend policy.
After an unremarkable year, Amec’s share price has suddenly shot up by 13% in the last month, as the market finally wakes up to its undervaluation. Would I still buy it today?
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Amec has been busy lately. Earlier this week, it expanded its nuclear services activities by acquiring US firm Automated Engineering Services Corp, which generates around $30 million in annual revenues. The acquisition followed hard on the heels of last month’s announcement that the UK government has extended Amec’s contract to decommission the Sellafield nuclear site for another five years. Although that hardly excited markets, with Amec under fire for the sluggish pace of its clean-up operation. Its attempt to buy rival Kentz in September flopped, with Kentz claiming the offer was undervalued.
Citi-gritty
Analyst attitudes to Amec remain mixed. In September, UBS reduced its target price from 1,200p to 1,145p and downgraded the stock from buy to neutral. Last month, Citigroup singled out Amec as its least favourite oil services stock, claiming its valuation underestimates the risks of further spending cuts in high cost areas such as mining and oil sands, where Amec is active.
Citi rates the stock as neutral with a target price of 1,100p. Others are more positive: Deutsche Bank and Goldman Sachs both have it as a ‘buy’ with a target of around 1,250p, although that isn’t much of a premium over today’s 1,191p.
You can expect mixed reviews when your half-year profits dip 2% to £117 million and your revenues fall 1% to just under £2 billion, as Amec reported in August, even if your order book stands at a record £3.9 billion. If the investor rewards are so-so, the risks are high, with Amec working in politically sensitive areas such as nuclear and oil sands, and unconventional oil and gas.
Dividend policy is progressive, with the board recently proposing a 15% rise in the interim dividend to 13.5p per share. But that recent share price surge has knocked the yield down to 3.1% and raised the valuation to 14.6 times earnings. Despite strong forecast earnings per share growth of 14% in 2014, I won’t be buying Amec today.
