The market can't quite decide about the quality of ALS Ltd's (ASX: ALQ) full year result with the stock swinging on both sides of break even.
Shares in the laboratory testing services group fell 0.8% when the earnings news was released, before advancing 0.5% to $6.46 in late morning trade.
But there's little doubt in my mind about what investors should do – sell into the rally.
Don't get me wrong. The results weren't terrible. I just find it hard to justify holding a stock that's heavily exposed to the resources industry when it's trading on a price-earnings (P/E) multiple of 19.2x.
Even if ALS manages to grow profit by 5% in the current financial year, which is well ahead of consensus estimates, the stock will still look expensive given its challenging outlook.
Dividends also disappointed with management halving its final dividend to 10 cents a share. This takes the full year dividend to 21 cents when most analysts were tipping a 24 cent payment.
The 21% decline in underlying net profit to $134.4 million for the year ended March 31, 2015 and the $290.6 million impairment charge were expected as management had flagged these in its guidance at the end of April.
However, the margin squeeze was worse than I expected with the earnings before interest and tax (EBIT) margin dropping to 15.9% from last year's 18.6%.
Just about every division suffered from margin erosion due to growing competition. No surprises that its minerals testing business is under strain as miners cut spending, but its energy division experienced a near halving in EBIT margin.
Revenue from its oil & gas testing business jumped 24% due to a recent acquisition but EBIT tumbled 31%, which is mainly due to coal mining clients outside of Australia closing their purses.
Even ALS's life science testing division, which is a star performer, is feeling the margin squeeze as EBIT growth of 3.9% failed to keep pace with the revenue increase of 5.7%.
The only division to see a margin improvement is its asset care and facilities monitoring business. Sadly, this division contributes less than 13% of group revenue. The largest division is life sciences as it accounts for around 37% of total sales.
There was some glimmer of hope in the company's outlook statement. Management thinks the worst is over for the minerals testing business and the division will stay flat for 2015-16 (although we have heard this before).
Management is also very upbeat about the oil and gas division and called it "very attractive" but there's no sense of when investors can expect a big turnaround in the business.
ALS is also keen on making small acquisitions of food testing businesses in Europe and North America to bolster its life sciences unit.
All that is great for the longer-term prospects for ALS, but as I said before, the stock looks stretched given the lack of any obvious near-term catalysts outside of corporate interest.
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