The FTSE 250 has delivered a respectable 21% gain over the last year. But that’s only a fraction of the profits that have been enjoyed by shareholders of the index’s top-performing engineering stocks.
Many of these companies’ profits were hit hard by the downturn in the oil and gas market in 2015. When the market started to recover last year, their share prices headed north with impressive speed.
The question today is whether these stocks are still worth buying — or whether the good news is already in the price.
A very precise choice
Shares of instrumentation group Spectris (LSE: SXS) are worth 70% more than they were 12 months ago. And they rose by 3% on Tuesday morning after the group said that sales rose by 13% to £1,345.8m in 2016, beating market forecasts. Adjusted earnings of 127.5p per share were also ahead of forecasts, which suggested a figure of 119.7p.
These impressive headline figures masked a £115.3m writedown in the value of the firm’s Omega Engineering and ESG Solutions businesses, which traded poorly during the period. Although this was a non-cash writedown, it’s significant because it implies lower earnings expectations for the future.
On a more positive note, Spectris acquired Millbrook, the UK’s main testing facility for car manufacturers, last year. This complements some of the group’s existing business and contributed to last year’s sales growth.
Is Spectris a buy?
Spectris achieved an adjusted operating margin of 14.9% last year. This is in line with previous years and suggests the group’s business has retained its profitable edge.
Net debt is low and last year’s 52p dividend was covered three times by free cash flow. Spectris appears to be an attractive business, but the shares now trade on a P/E of 20 with a yield of just 2.1%. Any disappointment could cause the shares to slide. I’d hold, but might be tempted to wait for a better buying opportunity.
Should you bet on oil?
Spectris makes some of its profit from the energy sector. But for pump manufacturer Weir Group (LSE: WEIR), the oil and gas market is far more important. Weir shares fell by about 55% in 2015.
The shares are now worth 135% more than they were a year ago, but only 6% more than two years ago. This pricing implies that Weir is ready to pick up where it left off before the oil market downturn. Is this realistic?
There are certainly signs that the US fracking industry, a key market for Weir, is ramping up activity to profit from higher oil prices. But the number of new wells being drilled is much lower than it was before the market crashed.
Weir’s valuation is also demanding. The stock now trades on a 2016 forecast P/E of 32, and a 2017 forecast P/E of 24. The dividend yield has fallen to 2.2%.
Weir’s profits are expected to reach about 60% of their 2013 peak in 2017. In my view, there probably is a little more to come.
With results due on 22 February, existing shareholders should probably hold. But for new buyers, I’d argue that the risks outweigh the likely reward. There’s better value elsewhere, in my opinion.
Don't buy before you read this
Investors who bought Spectris and Weir last year when they were out of favour have enjoyed super-sized profits. So where are today's contrarian picks?
Our experts have identified a FTSE 250 stock they believe could rise by 200% over the next few years. The company in question is profitable and boasts a well-known brand that's being used to back a global expansion.
Roland Head 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.