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Should you add RCR Tomlinson to your watch list?

These days, mining-related companies have taken a tumble, some of it well deserved because of lower earnings expectations, but when the market in general casts a pale eye over the whole industry and paints all companies with the same brush, then it’s time for investors to start going through the bargain bin to see what Mr. Market is discounting.

RCR Tomlinson (ASX: RCR), an engineering firm with exposure to mining, resources and now infrastructure, isn’t following that pattern so simply. It may be down 23.8% from its October 28 high of $3.90, yet the rise in share price in August-September was driven by the acquisition of Norfolk Group and expectations of the upcoming annual results in October.

The pullback gave up about half of the gain up from about $2.30, around where it was when the Norfolk acquisition was announced. Adding Norfolk’s business to RCR Tomlinson gives it exposure to the infrastructure industry, whereas before it was predominantly mining and resources related.

Going forward it will need this diversification, and open up more business opportunities in Queensland and New South Wales.  It currently is completing work on ore processing facilities for Fortescue Metals Group (ASX: FMG) at its Solomon mine in Western Australia, and earlier designed and manufactured a steam generator and other equipment for a power plant that would mostly supply electricity to BHP Billiton’s (ASX: BHP) inland operations near Newman, WA. Also, it worked at Newcrest Mining’s (ASX: NCM) Cadia mine, winning contract extensions based on its solid performance there.

Even before the Norfolk acquisition adds to its revenue, the company already had a 37% increase in NPAT, from $27.2 million to $37.2 million in 2013. The company is restructuring its business divisions as RCR Resources, RCR Energy and RCR Infrastructure. Having more work in NSW and QLD through Norfolk’s business network will open more contract work for oil and gas projects and general infrastructure. That dovetails nicely with the rising LNG business about to get underway over the next several years, offsetting weakness coming from the mining industry until commodity prices firm up.

Foolish takeaway

Over the past 10 years, NPAT has risen from $2 million to $37.3 million, giving a compound annual growth rate of about 34%, and its 10-year total shareholder return of an average annualised 25.3% shows the company can deliver stable, growing earnings.

Since net profit margin is usually under 5%, investors need to see adequate business growth, so the latest acquisition can satisfy that, in addition to allowing for more geographical diversification overseas potentially.

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

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