Engineering firms Lamprell (LSE: LAM), Fenner (LSE: FENR) and The Weir Group (LSE: WEIR) all have significant exposure to the oil industry, and this has been reflected in each company’s share price over the last six months:
|
Company |
Six-month share price movt |
2015 forecast P/E |
|
Weir |
-34% |
12.4 |
|
Lamprell |
-38% |
8.2 |
|
Fenner |
-40% |
9.4 |
These are big falls, and all three companies now look cheap on a 2015 forecast P/E basis.
The question for investors is whether the valuation of these firms reflects the full impact of lower oil prices — or whether there is worse to come.
Lamprell down 13%
We received a taste of what might be in store this morning, when rig builder Lamprell said that pricing pressure and reduced capital expenditure by its customers is likely to mean that the firm’s 2015 sales and profits will be around 10% below current forecasts.
It’s not all bad news, however: following last year’s rights issue, Lamprell is in a relatively strong position to weather this storm, with net cash of $275m. The firm also looks cheap — after factoring in today’s profit warning and price fall, Lamprell shares trade on a 2015 forecast P/E of just 8.2.
Worse to come at Weir?
Weir shares have fallen heavily over the last year, but I’m not convinced these figures reflect the full impact of lower oil and gas prices.
In its last update, in November, Weir was still reporting strong market conditions in oil and gas, including in the US shale market.
Lower oil prices are already causing a fall in the number of drilling rigs in use in the US, and Weir is also exposed to weak conditions in the iron ore market. I’d be surprised if the firm doesn’t adopt a more cautious outlook when it publishes its full-year results in February.
Fenner looks tempting
Fenner’s decline last year was mainly the result of heavy exposure to the mining industry, to which it supplies specialist conveyor belts and other related products.
However, Fenner is also exposed to oil through its Advanced Engineered Products division, so likely cutbacks in new oil projects might result in Fenner trimming its sales expectations for the year ahead.
I’m not sure: Fenner might be cheap enough already, but we’ll find out more on Wednesday 14 January, when the firm publishes its first quarter update.
My verdict
All three of these companies are on my watch list. I’m not sure they’ve reached the bottom of the downgrade cycle yet, but they are all starting to look seriously cheap, to me.
I plan to watch closely, and expect to buy shares in at least one of these firms over the coming months.
