One dividend growth stock I'd buy ahead of FTSE 100 member Rolls-Royce
Engineering firm Weir Group (LSE: WEIR) was 5% higher at pixel time, after issuing a solid trading statement and announcing a $1,285m deal to acquire US mining equipment firm ESCO Corporation.
Weir specialises in equipment for the oil, gas and mining industries. It's already made a strong recovery from the recent downturns in both sectors. Today's news means that the firm will increase its focus on the mining sector, which is already its largest customer.
Let's take a look at trading first and then see how the ESCO acquisition might fit into the picture.
Sales up by 22%
Orders rose by 22% during the first quarter, compared to the same period last year. The mining business performed well, with orders up by 13%. However, the oil and gas division rocketed ahead of this with a 50% surge in orders for pumping equipment, mostly from US shale drillers.
The company was already expected to do well this year and at this point, full-year forecasts have been left unchanged. However, I suspect that if this strong momentum continues through the first half, full-year forecasts could be notched higher.
What about the acquisition?
ESCO Corporation is a market leader in "surface mining ground engaging tools". The company's products include the giant buckets and shovels used by miners to dig huge holes in the ground.
The $1,285m purchase price equates to 12.6 times ESCO's 2018 forecast earnings before interest, tax, depreciation and amortisation (EBITDA). That seems fully priced to me, but if the mining market continues to expand for the next few years, the deal could prove to be quite reasonably priced.
It's quite a big acquisition for Weir, and the firm intends to use a mix of shares, cash and debt to fund the transaction. The group's slowest-growing division, Flow Control, is also being placed up for sale.
A lot of new shares will be issued to help fund this deal. Full-year earnings forecasts are likely to change significantly as the new shares and ESCO's earnings are factored into analysts' projections.
However, my view is that Weir probably remains good value on a three-to-five-year timescale.
Flying high already
I'm less convinced by the investment case at FTSE 100 engineer Rolls-Royce Holding (LSE: RR). The group recently announced the sale of its L'Orange fuel injection business for £610m, which will reduce debt levels and make cash available for other acquisitions.
However, the latest news from the company suggests that challenges remain in its jet engine business. Around 380 of its Trent 1000 engines require additional inspections due to potential problems with the "Package C compressor". This will have a cash impact.
The additional cash cost hasn't been specified, but Rolls has admitted that it plans to delay certain non-essential spending in order to avoid cutting its full-year guidance.
My view
Chief executive Warren East seems to be doing a good job of transforming this complex business. I've no doubt Rolls-Royce will make a full recovery. My concern is that the shares already look quite fully priced, trading on 27 times 2019 forecast earnings.
It's not clear to me if the company's profits can return to the levels seen in the past. If they do, the shares could be good value at present. I'm not entirely convinced, so I'm happy to stay on the sidelines and risk missing out.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Weir. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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