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Pump it up for Weir Group
Pumps and valves may sound boring, but Weir Group (WEIR.L) has built a hugely successful business making them.
Weir Group supplies its specialist pumps and valves to power, oil and gas, and mining companies around the world.
In this introduction to the company I explain why the company's position is robust but why investors need to keep a keen eye on the outlook for its prospects.
Weir Group, this week’s Top Stock, operates at what you might call the heavy end of industrial life. The company, founded by brothers George and James Weir in the west of Scotland in the 1870s, makes pumps and valves for the mining, power and oil and gas sectors.
Being a supplier to the booming mining and commodities industries has been a brilliant place to be as the company’s share price chart over 10 years shows how it has grown to be a FTSE 100 giant.
Weir is a good example of how far specialisation can take a company. The words pumps and valves may sound basic and ordinary to many of us but Weir equipment is at work in all sorts of challenging places.
In power plants, its pumps remove sulphur dioxide before gases are released in the atmosphere, helping generating companies to adhere to strict environmental rules.
In mines, Weir pumps move the highly abrasive slurries in which ores are mixed with water so their valuable contents can be moved over long distances to places where they can be processed.
In oil and gas, Weir technology is used offshore and onshore, both ‘upstream’, where wells and drills get the stuff from out of the ground, and ‘downsteam’, where the hydrocarbons are refined and processed into gasoline, kerosene and liquefied petroleum gas.
There may be a finite amount of oil and gas on the planet but as energy demand increases, so too do the efforts to extract them from unconventional sources.
One growth area for Weir has been helping access oil and gas embedded in shale rock, using the controversial process of hydraulic fracturing, or fracking.
Here, Weir machinery is used to pump a water and gel mixture at extremely high pressures to great depths in order to crack the rock and release the oil and gas within.
Critics say fracking risks polluting the water supply but Weir insists that the operations take place well below fresh water aquifers.
The slowdown in the global economy has also caused concerns that demand for its pumps and valves will inevitably dwindle. However, so far the company’s order book has remained strong, although there are signs that margins are under pressure.
One protection for the company is the high level of after-market service it provides customers. Service and maintenance revenues account for around half of its turnover and make Weir’s position more secure than if it was relying on product sales alone.
Nevertheless, after a recent surge Weir shares look toppy, particularly if forecasts for next year do not prove accurate. Although it has grown its dividend consistently since 2000 the stock yields just 1.7% and trades at nearly 20 times earnings. So far though analysts are betting that the company has the momentum borne of a strong proposition to see it through.
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by Gavin Lumsden on Jul 22, 2016 at 16:24