The Investment Column: Wood Group can rise further on high oil and gas prices
Meggitt; Mecom Group
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Your support makes all the difference.Our view: Hold
Share price: 244.5p (+9p)
The oil services player Wood Group not only reported a 30 per cent rise in first-half earnings yesterday, but said its full-year results would beat City expectations. Unsurprisingly, its shares finished 4 per cent higher on the day.
Wood unveiled a pre-tax profit of $75m, up from $56m for the same period a year earlier, on the back of an 18 per cent jump in revenues to $1.5bn. Business is booming at the company because of the high price of oil and gas.
All three of Wood's divisions are exposed to the exploration and production of these commodities. Its engineering and production unit helps to design and manage the construction of oil and gas fields. Well Support makes electric pumps and well heads which help in the process of getting crude out of the ground, while Wood's gas turbine business provides spare parts for industrial turbines mainly used in the energy industry.
Oil majors are struggling to replace all the crude they pump with new finds, forcing them to invest heavily in new production. Hence the likes of Wood are enjoying record demand and have been able to charge customers higher rates for their services.
Although the price of oil is important for Wood, it is far from sensitive to its everyday ups and downs. In fact, the group says that even if it fell back to around $40 per barrel, its earnings would not suffer too much of a hit. This is because the majority of its clients dig wells with the aim of them being profitable at below $40. However, given present tensions in the Middle East, it is highly unlikely the value of crude will approach anywhere near this level any time soon.
Wood Group shares trade at a slight premium to the wider oil services sector. With many analysts talking about further upgrades to the company's earnings forecasts, this rating is fully justified.
Meggitt
Our view: Hold
Share price: 317.75p (-2.75p)
This column has had a positive stance on Meggitt stock for past three years and rightly so. It has more than doubled since the start of the Iraq war in 2003. Behind this share price performance has been buoyant demand in the group's civil aviation and defence markets and this is unlikely to change any time soon.
Yesterday, Meggitt reported a 12 per cent rise in first-half underlying profit before tax to £62m. Aerospace is by far its biggest business. It supplies the world's two biggest producers - Airbus and Boeing - with, among other things, brakes, flight displays and wheels. Given the raft of new aircraft that both are due to start churning out in the next two years, this market should remain robust.
As should the defence industry Meggitt supplies. The group's management told the City yesterday to expect a big jump in military spending by the US government next year as it tries to meet its commitments in Iraq and Afghanistan.
The only blot on the group's copybook in recent years has been its electronics division. However, this operation accounts for just 10 per cent of Meggitt turnover, and management is forecasting it to return to earnings growth in the months ahead.
Trading at 12.5 times forward earnings, the stock is the cheapest in the aerospace and defence sector, making it well worth holding on to.
Mecom Group
Our view: Buy
Share price: 50.5p (+0.5p)
In March 2005, Mecom, the vehicle of former Mirror Group chief executive David Montgomery, came to AIM as a £45m cash shell. Yesterday, Mecom returned from suspension as a major European newspaper publisher, employing 7,500 people, with annual sales of more than £650m and a £365m market capitalisation.
How has Mr Montgomery achieved this? Answer: By making three acquisitions, all completed at breakneck speed. First came a 15 per cent stake in the German daily Berliner Zeitung at the end of last year. Then, in June, the £130m purchase of the Dutch regional newspaper group Limburg, followed by last month's £600m deal to buy Norway's Orkla Media.
What is the former Mirror boss's plan? He aims to boost the low profit margins at all the papers he acquires by improving efficiency and, inevitably, cutting costs. At Orkla, for example, margins stand at 7 per cent. Mr Montgomery believes he can double this figure. The chances are he will succeed.
Mecom is backed by institutional investors such as Fidelity, M&G and Jupiter. Readers would do well to follow their lead.
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