Poor old investment bank analysts.
Just two months after Credit Suisse analyst Mark Samter reiterated his 'outperform' rating on WorleyParsons (ASX: WOR) with a price target of $26.10, the company goes and downgrades its profit forecast and the shares drop 22%.
In mid-morning trading, WorleyParsons' shares were trading at $16.74, a fall of 22.5%, after the company revised down its 2014 profit forecast from 'over $322 million' to between $260 and $300 million. The company cited greater than expected falls in revenues, thanks to weakness in its Australian Minerals & Metals business, project deferrals, soft global minerals and metals market, and delays in the ramp up of projects in the Middle East.
WorleyParsons provides professional services to the resources and energy sector, but like many mining services companies, has been hit by major miners cutting back on expenditure, selling off non-core assets and tightening up existing contracts. Leading Australian mining services company, Monadelphous (ASX: MND) yesterday warned that its 2014 profit would be lower than the previous year, and that the company's margins were under pressure.
WorleyParsons fall today has taken the mining services sector with it. Driller Boart Longyear (ASX: BLY) has seen its shares fall more than 3%, while UGL Limited (ASX: UGL), Downer EDI (ASX: DOW) and NRW Holdings (ASX: NWH) are all down more than 2%.
As we've warned a few times, when the miners cut back on their spending, focus on their core assets and increasing productivity at lower costs, the pool of jobs for mining services companies gets smaller and margins on those contracts also go lower. Therefore, the mining services sector as a whole is forced to shrink, with only the top quality companies likely to survive, albeit on lower margins, and smaller profits.
Foolish takeaway
Foolish investors might want to give the sector a wide berth. What might look like cheap stocks could end up being value traps. In a worst case scenario, some of the mining services companies could go to the wall.
