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Winning engineering companies diversify business

Mining and resources service specialist NRW Holdings (ASX: NWH) stated at its AGM that miners are still very cost-focused, and it expects that those conditions will continue into 2014. In the interim, it must turn its mining division strategy to other commodities and clients.

Currently, it has operations overseas in West Africa, and further international expansion is being reviewed to diversify, yet at this stage about 98% of its 2013 revenue came from Australia.

The coal industry in Queensland has been taking a beating with coal prices down and thousands of jobs cut since last year. The company is shifting its underutilised mining fleet equipment and vehicles over to its civil works division to work in the ramp up of civil projects.

Its 2014 revenue guidance was reaffirmed to be $1-$1.2 billion, which includes $1 billion in secured revenue for the year. 2013 revenue was $1.37 billion, in line roughly with 2012’s $1.36 billion.

These three engineering and mining services companies are diversified in industries and geographical areas.

WorleyParsons (ASX: WOR) is well diversified, with its largest operating region, Canada, at 29%, and Australia making up only 17%. The rest is roughly divided amongst the Middle East, North America and others.

Its share price has been trending down since March 2011, although net profit after tax (NPAT) has increased 8.6% over the last two years.

Leighton Holdings (ASX: LEI) has some diversification in the Middle East, about 16%, yet the other 84% is all in Australia and Pacific. Apart from the mining downturn, the company has been in the news over several scandals, which may also be affecting its share price. Currently, it is as $17.17 and at a price-to-earnings (PE) ratio of 12.

Monadelphous (ASX: MND) has 95% of its operations in Australia, but its mix of resources and sectors gives it good industry diversification. The largest segment, iron ore, is 38% of total revenue, but coming in second is oil and gas at 26%, which is holding up well because of expanding developments in LNG and existing oil projects.

Its share price is $17.60 with a PE of 10. Its net profits were up 24.1% in 2013, continuing its uninterrupted earnings growth since 2003.

Foolish takeaway

Just as investors must diversify, companies should also note the risks and cycles of their industries, and build in diversification rather than ride a roller-coaster of economic conditions and earnings ups and downs.

Monadelphus gets my tick of approval amongst these three, and the company’s results speak for themselves.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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