AMEC – A recent restructuring generates impressive growth

I thought I’d have a go at building up a database of info on companies, so I’ll be starting with the FTSE 100 from A to Z, and we’ll see how it goes.

The first company is AMEC, an engineering, project management and related services company that works with companies in the oil and gas, energy, infrastructure and related industries.

Market-leading, highly prosperous, robust

At first glance, this looks like a pretty solid company.  There have been no losses in the past decade, no cuts or suspensions to the dividend and the earnings and dividends have grown fairly steadily for as long as I care to look back (over 10 years).  On top of that, the balance sheet has net cash, so in theory, it should be relatively bulletproof.  This is my kind of company, at least on the face of it.

But not cheap

In terms of valuations and drivers of equity returns, it’s a mixed bag.  The dividend yield is around 3% which is below that offered by the FTSE 100, so I would expect higher growth to compensate for that, and that’s what I see.  The company has grown earnings at something like 7% a year over the past decade, handily ahead of the 5% or so managed by the index.  More recently, growth has taken off, post-2007 to be precise.

Recent major changes

Around this time, there was a major restructuring in which some non-core assets were dropped as they were generating empty revenue (i.e. no profits), and a project called ‘STEP change’ was brought in to cut costs in core businesses.  The target was an increase in the margins from 2-3% up to 7% and more.

They seem to have hit these targets and earnings have since been increasing by around 10% and more after an initial jump of 60% in 2008.

Of course, this is all good for existing shareholders; in 2007, you could have bought the shares for 500p, and now they trade at over 1,000p, and this is part of the reason why I wouldn’t consider investing in AMEC at the moment.

Recent growth results in high valuation

The higher levels of growth haven’t yet been shown to be sustainable.  Since this step change in the structure of the business only started in 2007/8, there are only four years of evidence to go on.  I like to see growth being consistent over as many years as possible, ten or more and the more, the better.  So while recent growth has been high, longer-term growth is still around that mildly impressive 7% rather than the more impressive 10% plus.

It’s probably because of this recent good growth that the valuation level is high, which shows up partly in the low-ish dividend yield.  The PE is around 14, which, while not high, isn’t exactly low either.  More importantly, the PE10 figure is north of 30, reflecting the relatively low earnings in the early part of the last decade and before the step change in 2007/8.

Perhaps once the current structure has settled in for a few more years and the recent growth has also settled into a sustainable rate, then I might be more tempted.  What I’d really need, though, is a lower price.  If it were trading at perhaps half the level it is today, then I think AMEC would deserve serious consideration.