The stock picker’s guide to Seven Group Holdings Ltd for 2014

Seven Group Holdings Ltd (ASX: SVW) holds a 35.3% stake in Seven West Media Ltd (ASX: SWM), the media company operating Seven Network and its print and digital media. In its capital goods business, it owns the Westrac equipment management company and AllightSykes outright, in addition to its 45% ownership of the Coateshire equipment rental business.

The largest majority of revenue and earnings come from Westrac, the Caterpillar heavy-equipment licensed dealer and repair service, and the second largest earnings source is its investment in Seven West Media.

Since the acquisition of Westrac by Seven Group in 2011, revenue has climbed from $3.2 billion to $4.9 billion. Correspondingly, NPAT rose from $248 million to $398.8 million.

With the mining pullback, concerns of mining project cutbacks and postponement of some greenfield development, mining related companies have been affected. However, the miners in fact have been ramping up production and in the case of iron ore, have been spurred on by higher commodity prices, so the increased usage of vehicles and equipment will actually speed up the need for maintenance and eventual replacement.

Other companies like Monadelphous Group Limited (ASX: MND) and Leighton Holdings Limited (ASX: LEI) are experiencing this since their work is connected with the production and maintenance of the mining operations.

Analyst forecasts indicate a median estimate of a decrease in EPS from the higher level in 2013, but then have them picking back up in 2015, so for investors, this may be an opportunity to start a position and look forward to the recovery.

In December, the company made two important announcements. First, it will be buying back up to 11.9 million shares on the market starting in January. This represents about 3.86% of total outstanding shares, so the company itself sees this as a good time to pick up some shares also.

Secondly, it will be acquiring the distribution and support business of Caterpillar Global, where the company operates in north-eastern China. Westrac’s China division will be providing sales, service and support for mining products in the related territories. The US$130 million acquisition will bring in an estimated US$210 million – $250 million in revenue for FY2015.

The company’s dividend yield is 5.27% and its PE is 6.3, which is toward the bottom of its historical range. Its $7.59 share price is below its $9.81 book value per share, and slightly above its net tangible asset value per share of $7.33.

Foolish takeaway

The company is doing the right moves that a market leader should when there is an industry lull. Share buybacks can take advantage of short-term price weakness.

It is also paying down its debt, thereby shoring up its balance sheet. Investors should look for these signs of management initiatives that lay the ground work for future growth. In a cyclical business, you prepare during the low of the cycle for the strong growth to come later.

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

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