Weir Looks Like a Strong Buy

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LONDON -- I've just been trawling through the FTSE 100 to find companies that can offer both an industry-leading position and a long-term growth story. One particular gem that caught my eye was Weir (ISE: WEIR.L) , the mining-equipment specialist.

Despite the firm's record order book and recent upbeat statement, Weir's shares have slumped more than 25% since their peak in February. But In my view, Weir's current forecast price-to-earnings ratio of 9.8 at 15 pounds presents a tantalizing buying opportunity into a first-class engineering company with significant upside potential.

Collapse in gas prices
Weir makes pumps and valves for the mining, power, and oil and gas sectors. One of its biggest growth areas is in helping firms access the huge oil and gas deposits embedded in shale rock through a controversial technique called "fracking."


However, U.S. natural-gas prices have fallen to a decade-low of late -- and are down more than 80% since their all-time high of 2005. In 2011, the oil and gas sectors accounted for 38% of Weir's revenues.

Weir provides one of every two high-pressure pumps used in the North American shale market. While Weir is geared toward the shale industry, there have been fears that low U.S. gas prices could dent demand for unconventional oil and gas resources.

However, Weir's mineral division, in which it is a world leader in slurry pumps, accounts for more than 50% of the group's operating profits. Of course, this in turn leaves Weir exposed to the mining sector, and a reduction in capital spending by the mining companies could reduce demand for the firm's infrastructure equipment. But right now, it is lower U.S. gas prices are hurting the share price.

The long-term case
I believe Weir's recent falls have been largely overdone for three reasons.

For starters, the "top-down" investment case remains firmly intact. Weir chief executive Keith Cochrane succinctly summarized the long-term case for Weir by saying that "the company is being driven by a cycle of economic growth linked to the commodities boom and the industrialization of countries such as China and India."

What's more, Weir is today much more protected from an economic downturn as a result of its growing after-market service revenues. Indeed, such sales now account for nearly half of the top line. Moreover, after-market services yield a much higher margin than sales of infrastructure equipment.

Plenty of growth
Thirdly, being a key supplier to the booming commodity industries has done wonders to Weir's growth rate and established an attractive track record. In fact, the firm has tripled its profits during the last five years, and earnings are still forecast to expand at a double-digit pace during the next year or two.

Furthermore, while the shares currently yield a modest 2.2%, the business has managed to grow its dividends consistently since 2000 -- with the payout doubling between 2007 and 2011.

All told, I believe Weir's potential isn't reflected in its current 3.2 billion pound market cap. With key structural themes underpinning its growth, the company makes an appealing long-term investment.

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Further investment opportunities:

At the time this article was published Christopher owns shares in Weir. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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