ALS Ltd continues to soar: Here’s why

Are investors being too optimistic?

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Laboratory testing and inspection company ALS Ltd (ASX: ALQ), ex-Campbell Brothers, has seen it shares climb more than 10% today, following yesterday’s 8.9% gain.

But it’s still a long way from its 52-week high of $10.64.

Yesterday, the company reported an adjusted net profit of $171.9 million for the 2014 financial year, and was within guidance expected by analysts. Perhaps the market was expecting a worse result, and instead, investors were relieved by the company meeting guidance.

But the end of the resources boom has had its impact on ALS. Earnings per share were down 35% compared to the previous year, despite revenues rising 3.3%. And if it wasn’t for acquisitions in its laboratories division, revenues would have fallen 18%, with minerals revenue growth sliding backwards at more than 30%.

ALS also declared a final 20 cent partly franked dividend, putting it on a yield of around 4.4% – something investors obviously appreciated.

But there is still an overriding concern that the end of the mining boom is yet to be felt, likely to depress ALS Ltd’s earnings next financial year as well – unless its other divisions can take over the heavy lifting. Another concern is the company’s debt – which has jumped 45% to $865.2 million, over last year.

And what goes for ALS, also goes for other mining services companies like Monadelphous Group (ASX: MND), Cardno Limited (ASX: CDD), RCR Tomlinson Limited (ASX: RCR) and Fleetwood Corporation Limited (ASX: FWD).

It’s probably a sector most investors should be avoiding, until we’ve see the bottom of falling resource project investment. For those investors looking for an alternative, have we got a much better stock idea for you…

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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