Should I Buy Aggreko?


LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. Should I power into Aggreko ?

Olympic champion
Power-systems specialist Aggreko is hot stuff right now, after posting final results for 2012 showing a 12% rise in profits to £367 million and 14% rise in underlying revenues to £1.58 billion.

Management was full of praise for, um, itself, hailing the group's "flawless execution of the London Olympics", which is more than G4S can say. I don't own shares in this company, which rents out generators and temperature control equipment, but wish I did. Should I buy Aggreko now?

Well, plenty of other investors have been buying. After the latest results were published, the stock experienced a power surge, rising around 15%. This partly reflected the excellent figures above, and was partly relief after a worrying trading update in December, which suggested the outlook for 2013 was "particularly uncertain".

Some £100 million revenue was under threat, as U.S. troops exited Afghanistan and post-earthquake demand for emergency generators in Japan subsided. The admission instantly knocked 26% off the share price, which plunged from £22.50 to £16.60.

Power to the people
Chief executive Rupert Soames was more reassuring this month, pointing to a "very strong start" to 2013, with almost 20% more power on rent than a year ago, partly helped by an acquisition.

Aggreko works across 100 countries and growth was broadly spread, with the inevitable exception of Europe. This year could still be a bit of a struggle, but management predicts double-digit rates of growth in revenues over the next five years, with margins and returns on capital in excess of 20%. Power on!

Even the doubters have been won over, including broker Investec, which has just upgraded Aggreko to a buy, praising its confident business model and clear financial guidance.

Cooling off
Aggreko currently trades at £19.88, so it hasn't recovered all of its December losses just yet (it is still down 11%). Yet I find myself hesitating to back this stock.

Group debt rose last year to £593 million, up from £365 million in 2011.

And there are no Olympics or major football tournament this year to produce a short-term surge in profits. So earnings-per-share growth is set to be negative during 2013, at minus 6%, although 2014 looks better at 9%.

Income seekers will be disappointed by the 1.2% yield. Value hunters will be deterred by the expensive valuation of 20 times earnings. This is definitely a power player, with 18% profit margins, and its modest PEG of 0.6 suggests there is scope for growth. But to me, the share just isn't cheap right now.

Anyway, who wants a 1.2% yield when you can enjoy nearly 6%? That's what's on offer from this Motley Fool favorite stock pick.

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Harvey Jones has no position in any stocks mentioned. The Motley Fool recommends Aggreko. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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