Housebuilder Berkeley (LSE: BKG) is set for promotion to the FTSE 100 when the FTSE committee announces the results of its quarterly index review on Wednesday. Meanwhile, engineer Weir (LSE: WEIR) is set to lose its place in the top index, and to drop down to the FTSE 250.
Climbing the ladder
Housebuilders have made a terrific recovery since the financial crisis. Persimmon, Barratt Developments and Taylor Wimpey were all kicked out of the FTSE 100 when their valuations plummeted in the dark days, but have since regained their places at the top table.
As testament to the continuing strength of the sector, Berkeley — whose market value has climbed to £4.5bn — is set to enter the FTSE 100 for the first time in its history. The company has benefitted from its focus on London and the South East. Profits have been growing strongly, with a pre-tax £540m posted for the year ending 30 April 2015. And management is targeting £2bn over the three-year period 2015/16 to 2017/18.
Berkeley is wallowing in cash — £431m (and no borrowings) at the last year end, up from £129m a year earlier — and shareholders can look forward to continuing juicy dividends. With a 4.6% yield and an undemanding price-to-earnings (P/E) ratio of 12.4, investors can continue to profit as Berkeley makes hay while the sun shines.
Pumps dumped
The macro environment for engineer Weir couldn’t be more different to the market backdrop Berkeley is enjoying. Weir has been one of the many casualties of the slump in the oil price over the last year or so. The Scotland-based pumps, valves and turbines group has seen its shares fall by around 30% since the last FTSE index review in what the company’s chief executive describes as “the most severe downturn in oil and gas markets for nearly thirty years”.
With its market value having fallen to £2.9bn — putting it some 25 places below the UK’s top 100 companies — Weir is set to be unceremoniously dumped from the elite index, and to join the second-tier FTSE 250.
However, it’s not all bad news, and Weir looks an attractive recovery stock for investors prepared to take a long-term view. Even the near term isn’t so bad. City analysts expect Weir to post a 38% decline in earnings for the current calendar year, in line with the half-year performance. Management, though, has been taking steps to cope with the downturn. As such, despite the first-half earnings decline, operating cash flow was actually up 35%, and net debt came down to £817m from £861m.
A 2016 P/E of 13.8 and a 3.5% dividend yield look decent value for a company whose profits — and P/E — will be considerably higher when the macro background turns more favourable
