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Up 30% In 2014: Is The Weir Group PLC Primed For Further Gains?

The Weir Group (LSE: WEIR) has gained 30% so far in 2014, making it the fourth-best performer in the FTSE 100 over the last six months.

Shareholders were not deterred by the failure of the firm’s attempt to takeover Finnish firm Metso Oyj,and the stock has surged higher this morning, following the latest in a round of broker upgrades — this time from Citigroup, which increased its target price for Weir stock from 2,600p to 3,100p.

Given all this rampant bullishness, is it time for canny shareholders to take profits on Weir, or are there more gains to come? I’ve been taking a closer look at Weir to find out more.

Pumping profits

Weir’s financial performance has been remarkably strong over the last five years:

Weir Group Compound average growth rate 2009-13
Operating profit 21%
Operating cash flow per share 9.5%
Earnings per share 22%
Dividend per share 15%
Net debt 44%

Weir’s operating profits have risen by an average of 21% each year since 2009, while the firm’s 15% average dividend growth means long-term shareholders have enjoyed above-average income growth.

It’s also encouraging to see that operating profits and earnings per share have risen in sync, showing that growth hasn’t come at the expense of dilution for existing shareholders. Indeed, the average number of Weir shares in circulation has risen by less than 1% over the last five years.

Although the 44% average annual growth in net debt suggests that Weir has been on a debt binge to fuel its growth, the true situation is slightly more nuanced. Weir’s net gearing peaked at 60% in 2011, and has fallen back to 50% since then — a level that’s I think is acceptable, given Weir’s strong cash generation and near-20% operating margins.

What’s it worth?

Of course, even the best growth stock is only worth a certain amount. Let’s take a look at Weir’s current valuation:

Weir Group Valuation
Trailing P/E 19.1
Trailing dividend yield 1.5%
2014 forecast P/E 19.2
2014 prospective yield 1.6%

Source: Analysts’ consensus forecasts

Weir’s profits are expected to remain broadly flat this year, and the firm’s P/E of 19 does seem steep for such limited growth. However, Weir does expect to deliver underlying profit growth, excluding the effects of currency headwinds.

Is Weir still a buy?

Weir has definitely rewarded shareholders who’ve held the shares despite their rising valuation. Long-term holders will also be enjoying a dividend yield on cost that could be approaching 10%.

The firm’s valuation is a risk, as near-term disappointment could hit the share price, but I believe Weir’s long-term prospects remain good, and would suggest that any short-term weakness would be a good buying opportunity.

Where is the smart money flowing?

Weir's growth has been helped by high oil prices, but history tells us that these calm periods can end with painful volatility.

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> Roland does not own shares in any of the companies mentioned in this article.