EUR 850.00 For Business Accounts Only

Morningstar | Maintaining Weir FVE as Positive Revision to Minerals Offsetting Negative Revision for Oil and Gas

We're maintaining our Weir fair value estimate of GBX 1,700 after reflecting on the company's recent results. Our no-moat rating also remains in place. The unchanged fair value estimate is a product of a positive revision to our forecasts for the company's minerals segment offset by a negative revision to our forecasts for oil and gas. Our 2022 operating income forecast for Weir still stands at about GBP 450 million, but we now expect about GBP 245 million to come from minerals and GBP 190 million from oil and gas, versus about GBP 220 million and GBP 210 million previously.

The positive revision to minerals reflects first the strong revenue and orders the company saw in the first half of 2018 (somewhat exceeding our expectations). A strong book/bill of 1.12 means the company should see about 10% growth in the second half of 2018. Aftermarket revenue has increased solidly, with Weir maintaining an aftermarket capture rate above 90%. Previously, we had been cautious about competitive pressures cutting into Weir's aftermarket sales. We still think there's some possibility of this happening, but the scant signs of it in the past two years bolster our confidence in the business. We have accordingly increased our long-term revenue expectations for the minerals segment.

Conversely, we're lowering our long-term (2022) operating margin expectations for the oil and gas segment to 18% from 20% previously. Twenty percent remains management's target, but recent commentary on the segment leads us to believe that margins, currently around 15%, will fail to reach that mark. Even though pressure pumping (about 60% of segment revenue) has recovered to near-20% margins, the segment's results overall are much lower (near the low-single digits on average), owing greatly to steep competition. We think this could reflect persistent pressures on these parts of Weir's oil and gas business, therefore we think it's prudent to scale back our margin expectations.

Weir currently looks about 10% undervalued. We think investors have been overreacting to Permian basin oil takeaway constraints, which should have only a transient impact on the pressure pumping market, the most important end market for Weir's oil and gas segment.