Engineering companies are not often discussed among ASX investors, but there are a couple at the moment that look like excellent buys.
That's according to Shaw and Partners portfolio manager James Gerrish, who said in his Market Matters newsletter that Worley Ltd (ASX: WOR) and Austin Engineering Ltd (ASX: ANG) had recently "caught our eye".
'Double-digit sustainable earnings growth'
Gerrish's team is "long and bullish" on engineering company Worley after an investor day this week showed an impressive outlook.
"[Management] articulated its growth strategy, which they believe will drive double-digit sustainable earnings growth over the medium term – something that has eluded them in the past," said Gerrish.
"Worley is ramping up its capabilities towards battery metals, carbon capture, utilisation & storage & low carbon hydrogen."
The market is already taking notice, rocketing the Worley share price up 11.8% over the past week.
The business will be a beneficiary of a worldwide transition.
"An expected four-fold increase in global energy investment and decarbonisation projects provides a great backdrop to generate revenue," said Gerrish.
"However, it will be their ability to expand the currently thin margins that will provide the real kicker to profits."
Worley has admittedly been a disappointment for past investors, with the stock flat over the last five years.
Gerrish said this week's presentation "was a step in the right direction for this cyclical business".
"Trust has also been a missing ingredient, with the market having been disappointed in the past as targets have fallen by the wayside."
Punished too harshly, and ready to bounce back
The Austin Engineering Ltd (ASX: ANG) share price has crashed 27% since 2 May after a profit guidance downgrade.
According to Gerrish, there was a single source for the change in numbers.
"The downgrade stemmed from their Perth business unit which was expecting to deliver on a contract before year-end before the order was delayed," he said.
"As a result, much of the fixed costs associated with the contract will be booked this year, while the revenue won't land until 1Q24."
Even with that nose dive, the stock is 18.75% higher than it was a year ago, which is an enviable performance considering the rest of the market.
The reality is that the rest of Austin Engineering is sound.
"The other business units are progressing well with revenue growth coming through and margins improving as a result."
Thus Gerrish's team is "bullish" on Austin Engineering shares.
"We see Austin Engineering as oversold, given the share price decline was harsh relative to the downgrade."
