WorleyParsons results announced: Revenues up, margins down

This market darling is suffering margin contraction despite sales growth. An opportunity or one to avoid?

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WorleyParsons Limited (ASX: WOR) announced its half year results today, 29th February 2012.

Revenues were up 18% to $3.3 billion, and net profit after tax was up 18% to $152 million over previous corresponding period. Completing the trifecta, earnings per share was also up 18% to 61.8 cents. The company declared a dividend of 40 cents per share (franked to 79.3%).

The company advised that it expected to achieve good growth in 2012 compared to 2011 underlying earnings. The market obviously wasn't happy with the result, with shares down almost 2% on the day.

The company

WorleyParsons is a provider of professional services to the resources and energy sectors, and process industries. It has four segments: hydrocarbons, power, minerals and metals, and infrastructure and environment.

  • The hydrocarbons segment provides global project delivery included floating and deepwater solutions, offshore pipelines and subsea systems, onshore pipelines and receiving terminals, heavy oil and oil sands and refining and petrochemicals.
  • The power segment includes coal, gas turbine-based plants, nuclear, renewable energy and power networks.
  • Minerals and metals segment includes base metals, alumina, aluminium, coal, iron ore, and chemicals.
  • The infrastructure and environment segment provides solutions for resource infrastructure, urban infrastructure, coastal and marine, water and water wastes, transport and environment.

Costs and debt increasing, margins falling

The company hired 2700 additional staff in the last six months, taking the number of people employed to a new high of 37,800. The company stated that productivity, cost increases and project delays are impacting on their margins. Despite revenues increasing 18%, expenses increased by 17.4% as well in the six months to December 2011.

Total debt has increased from $675.5m to $805.5m and net debt to equity ratio now stands at 34.2%, compared to 27.2% as at 30th June 2011.

As Worley expands, its profit margins appear to be falling. For the first half of the 2012 financial year, the company's profit margin was 5%, compared to the 2011 full year profit margin of 6.4%.

For the love of a stock

A classic way of losing your dough is to fall in love with a company. Unfortunately, the company doesn't really care if you love it or not, and as someone said to me recently, "can't love you back".

For some time, WorleyParsons has been an ASX market darling. The company grew earnings per share by an average 60%+ from 2005 to 2008, and revenues by an average 100% per year over the same period. Return on equity averaged over 27% during this period.

These outstanding results saw the company's share price rocket from around $5 in 2005, all the way up to over $50 by late 2007.

The market seems to forget that WorleyParsons operates in cyclical industries and is not your classic growth stock. The company has been treated that way by investors who fell in love with the stock.

From 2008 through to 2010, the company's performance was rocked by the GFC, with revenues, profits and earnings falling along with the share price. Return on equity is now around 21%, and appears to be falling further.

Mr Market still appears to be in love with the stock however, with the P/E ratio currently sitting at 19.5, which is a fair way above the long term market P/E of around 14, and above earnings growth which has averaged just over 17% in the last five years.

The Foolish bottom line

As I see it, WorleyParsons is loved too much, overvalued and despite recent results, not growing as much as the market expects the company to. At the current price, there are much better options out there, and I'll definitely be avoiding it.

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More reading

Motley Fool contributor Mike King doesn't own shares in Worley Parsons. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy. 

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