Hedge funds have been steadily shorting mining equipment manufacturer Weir Group Plc (The) (OTCMKTS:WEIGY) (LON:WEIR) for quite some time now. The net short interest in the London-based company is now at 10.3% of outstanding shares which makes it the most concentrated short bet on the London Stock Exchange.
Weir cut in guidance contributes to short thesis
The shortsellers gained on their bearish bets as the company reported lower than expected earnings for the third quarter and cut its full year guidance. Shares of Weir Group Plc (The) (OTCMKTS:WEIGY) (LON:WEIR) slumped lower than 8% on November 4.
The company now anticipates pre-tax profits to lie between GBP425 million to GBP435 million in FY2013, compared to an earlier expectation of GBP446 million. The company noted in the conference call that total pre-tax profits could take another cut of GBP8 million to GBP10 million due to exchange rates. The reasons cited for the lower guidance were slower oil and gas recovery, a declining rig count and low price of natural gas.
However it appears that Weir Group is doing better than several of its peers. Morgan Stanley analyst Ben Uglow seems quite bullish on the company despite of lackluster earnings in Q3 and lower guidance. Uglow said that the mining industry is in a slowdown and there are fewer large investments, adding that the consensus was way too high for the company to meet. Morgan Stanley (NYSE:MS) rates the stock at Equal Weight.
The short and long side
Some famous hedge funds are betting against The Weir Group. Tiger cub Philippe Laffont’s Coatue Management has a 1% short bet in the company. U.K-based Lansdowne Partners has a bearish bet in 3.4% of the mining equipment maker, which is the largest single short position against Weir. Other shortsellers include Citadel Advsiors, AQR Capital and Steadfast Capital.
On the long side, London-based hedge fund Clairville Capital has a position in Weir Group. The company is the fourth-largest bet of its Pegasus Fund, which has gained a whopping 54% through October this year. Bramshott European is another hedge fund with a long position in the company, however both stakeholders counted Weir Group as their top negative contributor in the last month, according to their respective investor letters.
Better in minerals
Morgan Stanley noted that mineral trends at Weir were better than the rest of the equipment makers. RBC Capital Markets gave the same review, and further added that Weir’s principal revenue generator, minerals, has a lesser chance of being offset by the headwinds in the mining industry. RBC’s Andrew Carter and Wasi Rizvi noted that Weir reported a 5% y-o-y increase in aftermarket orders which was admirable both on a comparative and individual basis. The analysts further said,
“We believe that Weir’s end-market exposure offers potential for structural growth medium term. The group’s growth record and implied returns profile is also significantly better than the UK Industrial Goods sector’s. In our view, this combination should command a premium valuation multiple versus sector peers.”
RBC Capital Markets and Barclays PLC (NYSE:BCS) (LON:BARC) both maintained their Overweight rating on the stock. Barclays said that Weir Group has continued to show resilience in the minerals and order input is stabilizing whereas the oil and gas unit is positioned favorably in the long term as recovery in the U.S accelerates. Barclays’ Nick Webster said that so far the bears have not seen any major success on their short thesis that is based on pricing pressure and margin erosion.
Shares of Weir are up 15% YTD.