The resource sector and mining service companies which are reliant on the resource sector for work have both taken a battering in recent times. While the outlook is far from certain (but when is it certain?) and the potential for more near-term pain as firms adjust to a lower demand environment is still high, it is this uncertainty which can create opportunities to purchase stocks at attractive valuations.
While the following three companies aren't necessarily about to see their share prices race higher in the near term, as leaders in their respective disciplines their long-term outlooks remain positive.
Coffey International (ASX: COF) has two main divisions: Geosciences and International Development. While the International Development division continues to provide solid returns the Geoscience has struggles from weak demand from mining exploration. The company just released its results which the market responded positively to, sending the shares up 20%. While profitability within the Geoscience division is unlikely to bounce back anytime soon, the market appears to be betting that it might have reached a bottom.
Monadelphous (ASX: MND) is regularly named as the 'gold standard' of mining service firms with an enviable track record of profitably growing its business. Monadelphous' outlook is far from certain at this point in the cycle however at $17 some analysts are suggesting it could be 20% undervalued. Trading on an 8% dividend yield – if this is maintainable – then investors would be well paid while they wait for the stock to re-rate.
The future profitability of explosives maker Orica (ASX: ORI), like the other companies above, is difficult to forecast. As a leading global supplier of explosives and blasting systems it will continue to sell a lot of product however a softening in demand could have cause a significant contraction in profit margins. This means that a downwards pressure on earnings is likely to continue however at under $19 a share some broking analysts suggest the stock is undervalued.
Foolish takeaway
With so many share prices trading at 52-week highs it is getting harder and harder for investors to find value in the market. Patient investors will happily hold cash and wait for better high quality opportunities to arise. Other investors will chose to pick over lower quality discarded stocks looking for potential bargains. No matter what your approach is it is always important to determine a conservative valuation for the company you are considering and ideally only purchase when the company is selling at a discount to that valuation.
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Motley Fool contributor Tim McArthur owns shares in Coffey International.
