Despite the market troubles that continue to envelop Weir Group (LSE: WEIR), City analysts are convinced that profits at the pump-builder are about to snap back.
Current projections suggest Weir will put years of significant earnings weakness to bed with a 35% bounce in 2017. And a further 26% bottom-line build is chalked-in for 2018.
But I believe these forecasts could be in line for significant revisions should Weir advise of further turbulence in its end markets. The business is due to release first-quarter results on Thursday, April 27, a development that could see the share price scuttle lower again.
The Scottish business saw its share price sink to three-month lows in late February after announcing that revenues sank 2% during 2016, to £1.8bn, or 11% at constant currencies. And this forced Weir’s reported pre-tax profit to slump by almost a quarter year-on-year, to £170m.
In brighter news Weir advised that orders ticked 10% higher during October-December, the company noting that “mining and oil and gas markets showed signs of recovery” in the period.
Still, overall conditions remain difficult and Weir predicted “further modest reductions in overall mining capital expenditure in 2017.”
And while North American fossil fuel producers have vowed to increase exploration and production spending should oil and gas prices remain stable, the firm warned that “the pricing environment is expected to remain challenging.” And the market recovery in international markets is expected to be slower, Weir advised.
I do not believe these troubles are currently baked into Weir’s share price, with current growth projections resulting in a P/E ratio of 23.3 times. I believe the company still carries far too much risk for cautious investors.
Money trap?
The prospect of significant price reversals in Anglo American’s (LSE: AAL) key markets — and in particular iron ore — in the months ahead could see the company’s share price experience a sharp pullback, in my opinion.
The Australian Department of Industry, Innovation and Science has predicted that values of the steelmaking material will slump to an average of $51.60 a tonne this year, before falling to $46.70 next year. Iron ore was still trading above $90 this week.
While iron ore imports into China remain strong, with shipments leaping 12% year-on-year in January to 92m tonnes, sizeable port-held stockpiles suggest inbound traffic could moderate in the not-too-distant future.
The number crunchers expect Anglo American to follow last year’s earnings bounce-back with an additional 34% rise in 2017.
However, expectations that Anglo American’s bottom line will drop again in 2018, by 29%, underlines fears of rocketing iron ore supply as well as moderating demand.
Many contrarian investors will no doubt be tempted in by the mining giant’s ultra-low prospective P/E ratio of 7.1 times. But I for one reckon Anglo American’s long-term outlook remains too patchy for shrewd stock pickers to pile-in right now.
