Boart Longyear Limited (ASX:BLY), a AUDA$315.46M small-cap, is a engineering and construction (E&C) company operating in an industry, which is expected to benefit from higher gross domestic product, high consumer confidence, and upbeat private sector investments. Capital goods analysts are forecasting for the entire industry, a positive double-digit growth of 17.55% in the upcoming year , and a strong near-term growth of 23.77% over the next couple of years. However, this rate came in below the growth rate of the Australian stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether Boart Longyear is a laggard or leader relative to its capital goods peers. Check out our latest analysis for Boart Longyear
What’s the catalyst for Boart Longyear’s sector growth?
The E&C industry in Australia faces growing competition from players in China, Korea and India. Firms in rapidly growing economies have spent the past decade focusing on their home markets, gradually building up cash positions and internal expertise. Now, as growth eases in their home markets, they are expanding outward and seeking to compete against established global players. In the past year, the industry delivered negative growth of -10.60%, underperforming the Australian market growth of 6.89%. Boart Longyear lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Boart Longyear may be trading cheaper than its peers.
Is Boart Longyear and the sector relatively cheap?
E&C companies are typically trading at a PE of 17x, in-line with the Australian stock market PE of 18x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 9.36% compared to the market’s 11.87%, potentially indicative of past headwinds. Since Boart Longyear’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Boart Longyear’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Boart Longyear recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Boart Longyear as part of your portfolio. However, if you’re relatively concentrated in E&C, you may want to value Boart Longyear based on its cash flows to determine if it is overpriced based on its current growth outlook.