Weir's valuation now "compelling" after recent sell-off, Canaccord upgrades

12th Dec 2014 10:02

After the recent decline in Weir Group's shares on the back of the turmoil surrounding the oil price, the valuation of the engineering stock now looks "compelling", according to Canaccord Genuity.The broker upgraded its rating on the stock from 'hold' to 'buy', but slashed its target price from 2,725p to 2,340p.Weir provides services to a variety of markets but has been hit particularly hard by the recent plunge in oil prices given its exposure to the North American shale market, which Canaccord estimates accounts for 70% of its oil and gas division. The stock has lost over a third of its value over the past three months alone.With oil now trading at its lowest in over five years after collapsing over recent months, Canaccord expects the average active rig count in the US to fall by 16% in 2015 and a 15% decline in Canada.Rig count is forecast to trough below 1,400, compared with a peak of 1,931 reached in September, as shale production begins to "level off". "This is likely to be part of the solution to the ongoing over-supply in the oil market," said analysts Harry Phillips and Rob Ellis.As such, they have lowered their profit forecasts for Weir for 2015 and 2016 by around 13-14%.However, the stock is now trading at a discount to others in the sector and the analysts believe that "much of the potential downside is already reflected in the price"."The safe call would to be to maintain our 'hold' recommendation and cover the inevitable volatility and uncertainty of the next few months. However, the valuation looks compelling, we estimate operating margins in 2015 will be 18%, and the company is throwing off cash," Phillips and Ellis said."On a six- to 12-month view, we believe the risk/reward profile is heavily skewed to reward and move our recommendation to 'buy'."Weir was trading 1.4% higher at 1,719p by 10:30 on Friday, compared with the wider sector which was trading in the red.