JP Morgan upgrades Weir Group to Outperform

JP Morgan revised its target price on shares of oil equipment manufacturer Weir Group, judging that it had been too cautious regarding the firm's near-term pricing power.

The analysts said the improvement over recent months in the equipment manufacturer's two main end markets, Oil&Gas and Mining equipment, had been more dynamic than it expected.

Furthermore, its peers who had already reported their first quarter figures had surprised to the upside.

Given the 10% upside potential to the broker's target and risk of positive surprises should the pricing climate improve, JP Morgan decided to upgrade its recommendation from 'Neutral' to 'Overweight'.

Its target price was also revised higher from 1,800p to 2,175p.

The investment bank lifted its estimate for operating profits at Weir's Oil&Gas arm by 49% for 2017 and by 26% for 2018, on the back of the company's "aggressive" cost-cutting and expectations for higher top line growth.

A bigger than expected increase in the US rig count and stronger capex spend by US-based exploration and production firms meant sales at Weir were now seen growing 14% more than before in 2017 and 17% more in 2018.

Weir's Minerals unit was also expected to see better sales growth, with JP Morgan raising its estimate for sales by 5% thanks to high aftermarket growth and a "modest" improvement in capex related demand linked to brownfield developments.

The company's price-to earnings and EV/EBITDA multiples left its shares trading at "a modest premium to our industrial universe, despite the prospect of earnings rising around 4x faster than for the sector overall between ‘16 and ‘18E."