Is there value in mining services?

Have some babies been thrown out with the bathwater?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There's no doubt that the mining services sector has been severely hammered over the past 12 months or so, as producing miners bring operations in house, cancel exploration projects and do everything they can to wring lower costs in the core operations.

But at current prices, many mining services and construction & engineering companies are trading at less than half of their book value. History has shown that investors can do well buying stocks that are trading at discounts to their book value. In fact, the father of modern investing Benjamin Graham was well known for investing in these types of stocks.

Nowadays, it's rare for a company to trade below book value – it effectively means Mr Market is valuing the ongoing business at zero.

As some examples, Boart Longyear (ASX: BLY) is trading for one-fifth of its net assets, as is Forge Group (ASX: FGE), while Ausenco (ASX: AAX) and Ausdrill (ASX: ASL) are both trading at one-third of their book values, while MacMahon Holdings (ASX: MAH) is trading at 40% of its book value.

The upside for investors in these companies now is that the whole sector has been written off, and large institutional investors will either have sold out or loathe to buy more. Broker analysts will be having a hard time trying to attach a buy rating to these stocks, and attracting any positive interest in these stocks. It doesn't help that many of these stocks have been chucked out of the ASX indices – many managed funds are limited to investing in the top 200 or so companies.

For those investors willing to get their hands dirty and dig deeper into balance sheets, company announcements and/or speak to management, there could well be some hidden gems among the dross.

Here are a few pointers to look for. Companies with no debt and positive cash balances are less likely to need to raise capital and dilute shareholders. Intangible assets are likely to be worth nothing in a fire sale, so exclude them. Not all construction and engineering companies are wholly devoted to the resources industry, some have divisions dedicated to servicing oil and gas, utilities, power or government infrastructure sectors.

Foolish takeaway

When the market as a whole has turned against a sector, some of the babies may have been thrown out with the bathwater. That may well be an opportunity for Foolish (capital 'F') investors.

Motley Fool writer/analyst Mike King owns shares in Ausenco and Forge Group. You can follow Mike on Twitter @TMFKinga

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »