Are Lonmin Plc And Amec Foster Wheeler PLC Set To Double… Or Go Bust?

Should you buy or sell these 2 resource-focused stocks? Lonmin Plc (LON: LMI) and Amec Foster Wheeler PLC (LON: AMFW).

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Shares in support services company Amec Foster Wheeler (LSE: AMFW) were given a boost today after it announced the award of a seven-year contract with the US Air Force. The aggregate maximum value of the contract for the multiple awardees is $950m, although Amec Foster Wheeler hasn’t stated how much its portion of the contract will be worth.

This contract win marks another step on the road to recovery for Amec Foster Wheeler, with it attempting to diversify its business model away from the resources sector that has been hit hard by a falling oil price. As such, the company’s bottom line is forecast to have fallen by around 27% in the 2015 financial year and is due to flatline in the current year. This could cause investor sentiment to weaken somewhat in the short run and push Amec Foster Wheeler’s share price downwards over the coming months.

However, with the company having a relatively sound balance sheet and a prudent strategy to diversify, become more efficient and gradually improve its long-term financial performance, it seems unlikely that it will go bust. In fact, with its shares trading on a price-to-earnings (P/E) ratio of just 6.7, they offer exceptional capital gain potential. Although they may not double over the coming months, long-term investors could realistically realise a 100% gain over the coming years due to a very low valuation.

Ups and downs

Meanwhile, platinum producer Lonmin’s (LSE: LMI) comeback appears to have come to an abrupt end in recent days. It had recorded 75% share price gains in a matter of days to reach 63p per share last week, but has now come back to 47p after further doubts surrounding the outlook for the resources sector have come to light.

This is perhaps unsurprising since investors are extremely nervous right now and any positive or negative news, no matter how small, has the potential to dramatically shift share prices of mining and energy stocks. Therefore, Lonmin is likely to remain exceptionally volatile in the coming days and weeks.

With Lonmin having undertaken a fundraising towards the end of last year, it stated recently that it has sufficient capital resources with which to implement its new strategy. This is good news for the company’s investors, since Lonmin’s strategy has the scope to improve its efficiencies and long-term profit outlook, although it will clearly take time for the company to make a successful comeback.

The problem, of course, is commodity prices. Further falls are a very real threat to Lonmin and if they go low enough, then a number of mining and energy companies could be in real trouble. On the flip side, Lonmin is so cheap at the moment that it could rise by 100% or more over the medium term and so it may be of interest to the least risk-averse of investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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