Weir Group (LSE: WEIR) and Petrofac (LSE: PFC) are two similar companies with differing fortunes. The two engineering giants both provide equipment and services for the oil services industry, although Weir’s performance has eclipsed that of Petrofac.
Impressive results
At first glance, Weir’s half-year results, released at the end of July contain nothing to get excited about. However, the results were hit by a strong pound, which completely warped the figures.
Indeed, during the first six months of this year Weir’s revenue rose 6% on a constant currency basis, although after including negative currency movements, revenues dropped by 5%. Operating profit rose 4% at constant currency, but fell 7% at prevailing exchange rates.
What’s more, Weir’s management published a relatively upbeat statement on the company’s outlook. Specifically, management reported that the group was benefitting from a recovery in the upstream North American oil & gas market.
Nevertheless, what really concerns me about Weir is the company’s valuation. Based on current City estimates, the company is currently trading at a forward P/E of 18.6, which seems expensive for an engineering company. With the FTSE 100 as a whole only trading at a P/E of 13.8, Weir is trading at a significant premium to the wider market.
A cheaper pick
On the other hand, Petrofac trades at a less demanding valuation. The company currently trades at a forward P/E of 11, well below that of the wider market.
However, Petrofac has already warned on profits several times this year. It remains to be seen if the company can actually achieve the level of profitability management has targeted this year. Unfortunately, until Petrofac can prove to the market that it can be trusted again, the group’s low valuation could be here to stay.
Still, like Weir, Petrofac’s services are in demand. The group’s interim results for the six months to June revealed a record order backlog of $20.3bn, up 35% from the figure reported at the end of 2013. That said, group revenue and income for the period slumped, which concerned many investors.
During the first six months of the year Petrofac’s net profit more than halved, from $243m as reported last year, to $136m. Earnings per share for the period fell from 39.80 cents to 70.72 cents. What pleased investors however, was the news from Petrofac’s management that the company was on target to hit its profit guidance of $580m to $600m for full-year 2014.
But what to do?
So, should you dump Weir for Petrofac? Well, despite Petrofac’s lower valuation, until the company can regain investors trust, it would seem as if Weir is a better choice.
Indeed, while Petrofac has floundered, Weir has pushed forwards and profits continued to rise, for this reason it’s reasonable to suggest that the company deserves its lofty valuation.
For income investors, Weir is a poor pick. The group’s shares only support a token dividend yield of 1.6%, less than some savings accounts. It always pays to build a well-diversified portfolio of reliable dividend-paying stocks allowing you to reduce risk and sleep soundly at night.
