Power systems specialist Aggreko (LSE: AGK) has lost its sizzle lately. Over five years it can still can boast growth of more than 300%, six times the FTSE 100, but over the last three years the stock has gone nowhere. What’s gone wrong? And could this be a great opportunity to buy it?
Last time I looked at Glasgow-based Aggreko, back in March, it was hot stuff. It had just posted final results for 2012 showing a 12% rise in profits to £367 million and a 14% rise in underlying revenues to £1.58 million. Management was still on an Olympic high, highlighting its “flawless execution” of the London games. Pride comes before a fall, they say, and the stock is down 20% since then.
Post-Olympics blues
In August, Aggreko reported a 2% drop in half-year pre-tax profits to £146 million, largely due to a slowdown in emerging markets. This was followed by a slew of broker downgrades in September. Aggreko isn’t winning enough new contracts to replace three big projects that are coming to an end: the deal to provide temporary power to Japan after the 2010 tsunami, military contracts in Iraq and Afghanistan, and the £37 million Olympics win.
Sentiment has powered up slightly lately, management reporting in October that Q3 trading was in line with expectations, with revenue slightly up on last year, once you exclude the Olympic boost (revenues were down 6% if you don’t). Shares bounced 5% on the day, but 2014 could be a tough year. Aggreko’s local business division, which accounts for 60% of its profits, is doing well, but its international power projects division, which adds 40% of profits, is struggling. Management predicts this division’s revenues will “be slightly down on last year in the second half but ahead of the first half”.
Aggreko is a capital intensive business, with cyclical characteristics. Five years of double-digit earnings per share growth will come to an abrupt halt this year, with a forecast drop of 10%, followed by another 7% in 2014. At 15.9 times earnings the stock looks pricey, given its problems. Income seekers will be disappointed by its lowly 1.5% yield. Brokers still remain largely negative. Cantor Fitzgerald recently cut its target price from 2200p to 1700p and downgraded the stock to hold. JP Morgan has cut its target price from 1,800p to 1,620p. I’ve gone cool on this stock as well.
