The City loves a bullish CEO and a sexy turnaround story, yet this doesn’t always mean profits for investors. This international project management and services group focuses on the oil and gas (36% of sales), mining (6%), manufacturing (21%), power (22%) and environmental (12%) sectors.
Amec (AMEC), tipped as a BUY by Dresdner Kleinwort
Two years ago, Amec was on its knees after a series of profits warnings. But under new boss Samir Brikho, the stock has more than tripled from 280p in 2006 to over £9 today. If you’re one of the lucky few to have ridden this wave, you should now lock in some profits. I don’t think Amec is badly run, or that its earnings are about to drop off a cliff, it’s just that the stock looks way overbought.
City forecasts suggest the firm will hit 2008 sales and underlying EPS of £2.6bn and 38.9p respectively, rising to £2.9bn and 46.9p in 2009 on the back of strong customer demand, a £2.6bn order book and sky-high oil prices. This also assumes the group’s radical turnaround strategy succeeds, lifting operating margins from 5.1% in 2007 to 8.0% by 2010. Yet this is by no means certain – Amec is a people-dependent business that will experience margin pressure as the economy slows.
One also needs to be aware that growth at Amec’s lucrative clients – presently enjoying record profits due to rocketing energy and commodity prices – will eventually abate, filtering down the food chain and hitting supplier performance. So instead of the City’s lofty rating of 23.5 times 2008 earnings, I would put Amec on a more conservative 15 – equal to around £6 a share, or more than 30% less than today. Shareholders should also be aware of the execution risk in the turnaround plan, since the group is both buying new businesses and moving into higher-risk countries, such as Azerbaijan.
Sure, there is always a chance that Amec will fall prey to a takeover. But at present levels, I suspect most interested buyers would balk at the price. Interim results are scheduled for 28 August.
Recommendation: TAKE PROFITS at 948p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments