The Monadelphous Group Limited (ASX: MND) share price has rocketed up 42% year-to-date. The company operates in a cyclical industry, so is now the time to buy the stock?
As per the company’s website, “Monadelphous is a leading Australian engineering group providing construction, maintenance and industrial services to the resources, energy and infrastructure sectors.” The revenue split between maintenance and construction services varies cyclically.
For the half to 31 December 2018, Monadelphous posted a 5% decline in revenue and 18.3% lower net profit after tax, over the previous corresponding period. The declines were in line with expectations and were a result of the timing of construction project starts and completions, increased depreciation and a reduction in interest income.
Monadelphous trades at 25.7x earnings with a dividend yield of 2.9% (or 4.1% grossed up).
A volatile industry
The Monadelphous share price is more volatile than the overall market. When markets go down, the company’s share price tends to fall further than the S&P/ASX 200 (INDEXASX: XJO) index. On the flip side, the share price generally provides outsized returns in a bull market.
This is reflected in the company’s beta of 1.6 and could be a result of the company having a smaller market capitalisation of only $1.85 billion. It is also worth considering the fact that Monadelphous is heavily linked to the cyclical mining industry. As commodity prices rise and fall, capital expenditure by resources businesses also fluctuates.
Monadelphous is not fully protected, but is better insulated from this commodity volatility than some of its customers, because it has a portfolio of sizeable long term contracts for maintenance services. A great example of this is a three-year $240 million contract that was awarded by the BHP Billiton Limited (ASX: BHP) subsidiary BHP Billiton Iron Ore Pty Ltd in October 2018.
When investing in such a business, it is worth considering the profitability over the whole cycle and comparing this to competitors. Well-managed companies with strong balance sheets can weather the storm of a downturn and even win market share as competitors struggle.
The big picture
With the February release of interim results, Managing Director Rob Velletri said in a statement that “Overall, the long-term outlook for Monadelphous remains positive as operating conditions continue to strengthen and the pipeline of resources construction opportunities gains in number.”
Well-run companies will tend to outperform the market over time. Companies in cyclical industries can do just the same; however, they have more risk associated with them. Having a view of the macro environment, correctly timing your purchases of shares in companies like Monadelphous and having a long term time horizon are critical to putting the odds in your favour.
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Motley Fool contributor Proutlb95 owns shares in Monadelphous Limited and expresses his own opinions. 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 Scott Phillips.