Shares in Hunting (LSE: HTG), Amec Foster Wheeler (LSE: AMFW) and Weir (LSE: WEIR) have slumped over the past 12 months. Investors have turned their backs on these three companies as their outlooks have become increasingly uncertain.
The oil industry is facing an unprecedented period of change and fall in spending by oil majors, some of which are Hunting, Amec and Weir’s largest customers.
The bargain bucket
Contrarian investing, buying when the rest of the market is selling, can be an extremely lucrative strategy, but it’s also risky and not for the faint of heart.
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Nonetheless, Hunting, Amec and Weir have become three top contrarian investments over the past 12 months. Indeed, since mid-November last year, Hunting, Amec and Weir have underperformed the FTSE 100 by 45%, 50% and 40% respectively, excluding dividends.
However, the big question is, will these companies ever recover? Are Hunting, Amec and Weir misunderstood bargains, or falling knives that should be avoided?
Bargains or knives?
Weir and Hunting are just two of the many casualties of the US shale bubble, which has been slowly deflating for the past year as oil prices plunge to new depths.
Both companies supply equipment for the onshore oil and gas industry and had been increasing capacity to keep up with demand from the sector in the US. But now demand has slumped, and these two engineers have been forced to undertake drastic cost-cutting measures to realign operations to the lower level of demand.
After reporting record results last year, both Hunting and Weir are set to report dramatic declines in earnings this year. Specifically, Hunting’s earnings per share are set to fall 88% year-on-year while Weir is set to report a 43% decline.
Still, City analysts are expecting a slight recovery in earnings next year. Analysts have pencilled in 2016 earnings per share growth of 40% for Hunting and 2% for Weir. Although, even though the two companies are set to return to growth during 2016, they look relatively expensive at current levels.
For example, Weir currently trades at a forward P/E of 13.3 and a 2016 P/E of 13.5, while Hunting currently trades at a forward P/E of 57.3 and a 2016 P/E of 36.2.
These valuations don’t leave much room for disappointment and could signal further volatility ahead.
Worth the risk?
Overall, based on their current valuations, it could be wise to avoid Weir and Hunting for the time being but Amec looks more reasonably priced.
Even after warning on profits at the beginning of the month, Amec is still on track to report a pre-tax profit of £215m this year. On a per-share basis, the company is set to report earnings per share of 60.9p for 2015, which implies that the shares are trading at a lowly forward P/E of 7.5.
