Bradken Limited & Monadelphous prove what goes up, must come down

Mining services companies took a battering on Tuesday as industry leaders Bradken Limited (ASX: BKN) and Monadelphous Group Limited (ASX: MND) announced their respective 2016 full-year results.

With both sets of results disappointing the market, is now the right time to buy either of these stocks?

Bradken results

Bradken is traditionally regarded as a “safer” mining services stock, given its large consumables division which benefits from increased mining production activity.

With the major miners ramping up production, investors would expect Bradken to be somewhat insulated from a mining slowdown, as demand for its consumables increases in correlation with higher production.

Though this was the case in its 2016 full-year results, with sales from its consumable wear surfaces and mill liner increasing 19.8% and 10% respectively, it wasn’t enough to offset the softness in global resource and energy markets.

Full year revenue was down 15.2% with underlying net profit after tax (NPAT) down 13% to $29.5 million (already off a low base).

Monadelphous results

Monadelphous’ result was not much better.

Sales revenue was down 26.8% to $1.37 billion, due to lower demand for engineering construction services. NPAT plummeted 36.7% to $67 million, as margin pressures persisted.

Pleasingly, management flexed Monadelphous’ balance sheet strength to pay a fully-franked dividend of 32 cents as the company generated $78 million from operations.

Should you buy?

Investing in the mining industry is fraught with danger, as high capital expenditure with minimal pricing power is a recipe for disaster. The proposition is even more dire when looking at ancillary industries to the mining industry, such as the contractor and engineering services space where both Bradken and Monadelphous operate.

Whilst not all mining services providers are created equal, the fixed cost base of wages and decreasing demand for services mean mining services providers are at the mercy of big players like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) (each of whom have cost cutting agendas during cyclical downturns). Therefore, investing in these service providers is not for the faint hearted.

Although Tuesday’s fall shaved millions off Bradken and Monadelphous’ market capitalisations, the falls must be placed in context of their performance for the year-to-date. Both Bradken and Monadelphous’ shares have risen 314% and 35% respectively, easily beating the S&P/ASX 200 Index’s (ASX: XJO) rise of 6% over the same period, meaning they are not as cheap as they could be.

Foolish takeaway

As both Bradken and Monadelphous revealed on Tuesday morning, during depressed commodity price cycles, mining giants reduce maintenance spend and boost internal productivity to cut costs, resulting in reduced demand for services.

Whilst Monadelphous has taken steps to shield itself from energy and resource markets by diversifying into renewable energy, the economics of maintenance services remain the same in any industry.

Accordingly, mining services stocks are best avoided at current prices, in my opinion.

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Motley Fool contributor Rachit Dudhwala owns shares of Monadelphous Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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