The Motley Fool

Why I’d ditch this triple-bagging growth stock today

Today’s third-quarter update from engineer Weir Group (LSE: WEIR) kicks off with news of a 21% increase in orders, compared to the same period last year.

The firm’s all-important Oil & Gas division has seen a 59% rise, while the Minerals division, which serves mining customers, saw orders increase by 12%. So why did Weir fall by around 6% when the market opened?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Unfortunately, today’s update also included a profit warning. Operating profit is now expected to be “slightly lower than previously indicated” this year. According to management, this is because of project timing in the Minerals division, along with investment in future growth and plant reconfiguration.

Should investors be worried?

Digging into the detail in today’s statement, it seems that despite impressive order growth during the third quarter, Weir’s overall order book may have shrunk slightly during this period.

The group’s book-to-bill ratio — which compares new orders with billed-for completed work — fell from 1.06 at the end of June to 0.95 at the end of September. A number below 1 indicates new orders aren’t sufficient to replace completed work.

I see this as a short-term issue that’s unlikely to persist. The company’s main markets — oil and mining — are enjoying periods of recovery and growth. Looking ahead over the next few years, I’d expect Weir to do the same.

After today’s fall, the stock trades on a forecast P/E of around 22, with a prospective yield of 2.2%. In my view, this is probably about right. I’d continue to hold, but I don’t see the shares as a compelling buy.

How safe is this triple-bagger?

Shares of copper miner KAZ Minerals (LSE: KAZ) have risen by 186% over the last year. That’s pretty close to a triple-bagger.

However, this spectacular recovery is also a reminder of the biggest risk facing KAZ Minerals’ shareholders — debt. At the end of 2016, the group had net debt of $2.7bn and full-year earnings before interest, tax, depreciation and amortisation (EBITDA) of just $492m.

This gave the stock a net debt-to-EBITDA ratio of 5.4, more than double the widely-used limit of 2.5 that most investors find comfortable. The outlook was decidedly risky.

Fortunately, things have improved since then. The price of copper has risen by about 40% over the last year. Alongside this, KAZ has ramped up its own output, increasing its guidance for full-year copper production from 225,000-260,000 tonnes at the start of the year to 250,000-270,000 tonnes at the end of September.

Selling into a rising market has helped to boost the group’s earnings. During the first half of this year, EBITDA rose to $505m. This six-month figure is roughly equal to EBITDA for the whole of last year.

As a result, the group’s net debt had fallen to $2.2m by the end of September, a reduction of more than $400m in nine months.

I still wouldn’t buy

Although KAZ trades on a 2017 forecast P/E of 11, the group pays no dividend and appears to have cut capital expenditure to a minimum in order to fund interest payments and debt reduction. This situation may be hard to sustain without sacrificing future production growth.

I think the risk of disappointment is growing. I’d take profits on KAZ.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Roland Head has no positions in any of the shares mentioned. The Motley Fool UK has recommended Weir. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.