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Weir Group PLC, Diageo plc And Merlin Entertainments PLC Have Fallen ~10% In The Past Month: Time To Bulk Up?

Today I am looking at whether now is the time to plough into three beached big-caps.

Weir Group

It comes as little surprise that specialist pump builder Weir (LSE: WEIR) has taken a pasting over the past month as commodities markets have extended their struggle. The Scottish business has shed 9.1% during the period, prolonging its year long collapse — Weir has shed almost half its value since September — and July’s financial update has given no signs that a bounceback is imminent.

Weir saw pre-tax profits slump 40% during January-July, to £108m, while total orders drooped 18% to £1.04bn. The company noted that “this is the most severe downturn in oil and gas markets for nearly thirty years,” and added that “oil and gas will continue to be tough” thanks to a struggling North American fossil fuel sector. Accordingly the City expects Weir to experience a 37% earnings dip in 2015, leaving it dealing on a P/E rating of 17.7 times.

I would consider a reading closer to the bargain benchmark of 10 times to be a fairer indication of the risks facing Weir in the near-term and beyond, suggesting that much more pain could be in store for the share price. And given Weir’s murky outlook for both the energy and mining sectors I reckon an expected dividend of 44.5p per share, yielding 2.9%, is at severe risk, too.

Diageo

Drinks giant Diageo (LSE: DGE) has endured a rocky ride in 2015 as macroeconomic troubles in developing regions has shaken investor faith, and the firm’s shares have conceded 7.9% during the past four weeks alone. Although these concerns are nothing new, recent turbulence on Chinese stock markets and round after round of monetary easing has done nothing to assuage fears over this critical growth market.

Despite these current headwinds, I am convinced Diageo remains a long-term winner. The business advised last month that organic sales remained steady during the 12 months to June despite problems in Asia, and even eked out an operating profit improvement, to £2.79bn from £2.7bn last year. So with economic conditions in its biggest market of North American improving; Diageo doubling-down on the white-hot premium drinks sector; and steady acquisitions boosting the firm’s emerging market footprint, I fully expect the bottom line to surge higher once again.

This view is shared by the number crunchers, starting with a predicted 3% earnings boost in the year ending June 2016. This leaves the business dealing on a slightly-high P/E ratio of 20.3 times, but I believe Diageo’s bursting portfolio of industry-leading labels — and consequently hot growth outlook — merits this premium. And an estimated dividend of 58.5p per share, creating a market-matching yield of 3.2%, takes the bite off this measure.

Merlin Entertainments

Amusement park operator Merlin Entertainments (LSE: MERL) has of course been in the crosshairs in recent weeks after the tragic rollercoaster accident at its Alton Towers site at the start of the summer. Souring investor sentiment has seen the stock drop 9.2% since the middle of July, no doubt assisted by a profit warning issued during the period.

Merlin advised that the Alton Towers tragedy could dent earnings at its theme park operations — the company also operates Thorpe Park and Legoland — by as much as £47m in 2015, and added that visitor numbers at the park may not recover until 2017. Consequently the business expects earnings at the division to fall from £87m in 2014 to £40m-£50m this year. Despite these current travails, however, the City believes Merlin remains a decent long-term growth bet.

Although Merlin is expected to see group earnings flatline in 2015, a 16% surge is anticipated for 2016, driving this year’s P/E multiple of 22.8 times to 19.4 times for the following period. At face value this may appear expensive, particularly as the Alton Towers incident could linger further. But I believe the business’ market-leading position in a rapidly-growing industry still makes it a hot long-term growth pick.

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