HSBC upgrades Weir to 'buy', lifts Smiths target price

The bank lifted its 2017-2018 earnings per share estimates for the stock by 7% to 14% mainly on higher top-line/margin expectations in the oil & gas division on the back of the recovering oil price.

HSBC pointed out that crude oil prices have bounced back significantly after hitting 12-years lows at the start of the year, with Brent and WTI up more than 55% from their January troughs.

“Weir’s share price is more sensitive to oil price levels so the benefits of a higher oil price will be more expedient and impactful for Weir than others in the sector,” the bank said.

HSBC raised the price target on Rotork to 200p from 180p, saying the recent rise in the oil price lowers the risk for the company’s high oil & gas exposure, which was 53% of 2015 revenues.

However, it kept its ‘hold’ stance on the stock saying the risk/reward for Rotork is finely balanced with the shares trading on 21.3x 2016 price-to-earnings ratio.

HSBC maintained its ‘hold’ rating and 1,100p target on Smiths Group saying the downside risk was now fairly priced in as the stock has risen 15% since the start of the year.

“We believe that the rise in the oil price will benefit the John Crane business division only in the long term as around 60% of revenues is exposed to mid/down-stream oil & gas.”

More broadly, HSBC said oil and gas was one of the largest end markets for the UK engineers and therefore significant to its performance.

It noted Rotork had the highest exposure, followed by Weir and then Smiths.

The bank’s Oil & Gas team forecasts a Q3/Q4 2016 Brent price of $50/55 per barrel, reflecting a rapid market tightening assumption as supply/demand fundamentals balance.

It expects a Brent price of $60 a barrel in full-year 2017 and $75 in FY 2018, indicative of longer-term market tightness.

At 1225 BST, Weir shares were up 1.8% to 1,251p, Rotork was up 0.6% to 196.30p and Smiths was 0.3% higher at 1,098p.