Questor is The Telegraph’s stock-picking column, helping you decode the markets and offering insights on where to invest.

The world economy’s long-term outlook is extremely upbeat. Crucially, the present era of persistent above-target inflation across major developed economies is widely expected to gradually come to an end. This means that further interest rate cuts can be made that – once time lags have passed – act as a significant positive catalyst on global GDP growth.

Therefore, given our long-term focus, Questor continues to view the prospects for cyclical businesses such as Weir Group in a positive light. The FTSE 100 member, which provides engineering solutions to mining companies, recently released an upbeat set of half-year results that showed it is making strong progress in implementing its growth strategy.

The company’s operating profit rose by 17pc versus the same period of the previous year. While growth in revenue of 4pc aided the company’s profitability, the sharp rise was largely due to a 220 basis point increase in its operating profit margin. It stood at 19.8pc during the period as cost-cutting measures were successfully implemented.

A strong performance in the first half of the financial year prompted a rise in the company’s guidance for the full year, with it now expecting an operating profit margin of around 20pc to be achieved. When combined with robust demand for the company’s services from the mining sector amid an upbeat economic outlook, this suggests that its financial performance is set to improve.

Separately, acquisitions have the potential to boost Weir Group’s bottom-line growth rate. It has made several purchases over recent years, including two further acquisitions in the first half of the current year, and has the financial means to engage in additional M&A activity.

Indeed, its net gearing ratio currently amounts to a rather modest 68pc despite a year-on-year increase in net debt of around 65pc. Net interest costs, meanwhile, were covered almost 10 times by operating profits in the first half of the current year, with this figure likely to rise as the company’s profitability trends higher amid improved operating conditions.

Alongside the impact of acquisitions and an upbeat economic outlook, the company’s financial performance should be aided by the world’s push for net zero. It entails a rapid rise in demand for a variety of metals that are key to achieving the goal of decarbonisation, including copper and lithium, which in turn are likely to mean greater profitability for firms serving the mining industry, such as Weir Group.



Clearly, the company faces an uncertain period in the near term. As well as the prospect of aforementioned time lags following prospective interest rate cuts, geopolitical risks – notably from increasing protectionism – have the potential to harm the world economy’s performance in the coming months. This could not only negatively affect the financial performance of cyclical firms but also lead to weaker investor sentiment that prompts a period of elevated share price volatility.

Despite this, Weir Group is forecast to post a 10pc annualised rise in earnings over the next two financial years. While its price-to-earnings ratio of 20.5 may seem rather generous given its low double-digit near-term profit growth outlook, the company’s improving competitive position and solid balance sheet, as well as its long-term financial prospects, mean it offers good value for money at its current price level.

It could even be argued that the stock has upward rerating potential as falling interest rates cause investor sentiment towards cyclical stocks to improve alongside a faster-growing global economy.

Since Questor tipped Weir Group as a ‘buy’ during July 2018, it has posted a 27pc capital gain. While this is 11 percentage points ahead of the FTSE 100’s performance over the same period, it nevertheless represents a disappointing return. Indeed, it equates to an annualised capital growth rate of less than 4pc.

Given the prospect of an improving global economic outlook, the potential for further acquisitions and the growth opportunities presented by net zero, the firm’s future prospects are highly upbeat. As a result, combined with the company’s solid fundamentals, it remains a worthwhile purchase that is poised to deliver improved returns and stronger index outperformance over the coming years.

Questor says: buy
Ticker: WEIR
Share price at close: £24.58

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