A steady build in the US rig count propelled investor appetite for Weir Group (LSE: WEIR) to levels not seen since November 2014 late last month.
But signs that North American producers are returning en masse has not been the sole reason for Weir’s move higher, the stock’s value more than doubling during the past 12 months.
Investors have been buoyed by the prospect of the pump-builder’s earnings finally increasing after a possible four years of sizeable declines. Indeed, the City expects Weir to follow a 19% dip in 2016 with bounces of 34% and 23% this year and next.
But I believe hopes of a sustained earnings recovery are far from assured. Sure, while latest Baker Hughes rig data showed the number of US oil rigs rising for 14 out of the past 15 weeks, a competitive market means that Weir still has much hard work in front of it.
The engineer recently noted that “volume growth [during July-September] was offset by sustained pricing pressure which, combined with the division’s focus on reducing inventory and maximising cash generation, restricted flow through to profits.”
Meanwhile, hopes that Brent can maintain its push above the $50 per barrel marker are built on shaky ground as rising pumping activity Stateside, and lower-than-anticipated oil demand, keep stockpiles generously filled. And this threatens to keep capex budgets across the industry under pressure for some time yet, and with it sales of Weir’s services.
There clearly remains much uncertainty around its turnaround prospects, and I do not believe this is reflected in the stock’s forward P/E ratio of 23.8 times. And with the firm also carrying a below-par dividend yield of 2.2% for 2017, I reckon the pump play is far too expensive around current levels.
Shop elsewhere
Market appetite for Ocado Group (LSE: OCDO) has been much more muted as concerns over congestion in the grocery space rage. Despite a lack of buoyant buying activity however, the retailer still appears chronically overvalued in my opinion.
The number crunchers expect Ocado to follow a marginal earnings dip in the year to November 2016 with an eye-watering 24% drop in the current period. This results in a gargantuan P/E rating of 174.8 times.
And a prospective dividend yield of 0.1% really fails to cut the mustard.
Some would argue that a predicted 77% earnings surge in fiscal 2018, and the prospect of further meaty earnings growth in the years ahead, makes Ocado worthy of such a premium. But I am convinced the intense competition as both premium and discount chains expand, and more recent resurgence of established operators like Tesco, puts hopes of sustained bottom-line expansion in severe jeopardy.
Ocado is likely to have to keep on chucking vast sums at improving its services, not to mention slashing the prices of its goods, to stop the top line from stalling. I reckon the increasing fragmentation of the British grocery space makes the company an extremely high-risk pick, and particularly unattractive at current share prices.
