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Engineering firm chief should take £215m drop in his stride

THE £215 million drop in the stock market worth of Weir Group, in the wake of the Scottish engineering company's half-year results, was fairly eye-catching, even on a hectic day for corporate news.

Weir's results, published yesterday, showed a six per cent fall in underlying first-half profits before tax to £182 million. First-half revenues declined by five per cent to £1.14 billion.

It was the profit which appeared to disappoint the City, and Weir shares fell 3.8 per cent. And there was no news from Weir or its chief executive, Keith Cochrane, about the big acquisition which the company has been seeking, only the unveiling of a tiny deal to buy Canadian wellhead specialist Metra Equipment.

Sizeable Finnish engineering company Metso, which recently rejected Weir's overtures, saw its shares jump more than eight per cent yesterday after its results came in way ahead of market expectations. Metso unveiled underlying second-quarter earnings before interest, tax and amortisation of €131 million (£104 million), up from €118 million in the same period of last year and way ahead of the average €104 million forecast among analysts.

If Mr Cochrane was watching Metso shares surge as Glasgow-based Weir's stock fell, he could perhaps have comforted himself with the thought that at least he knows a decent acquisition prospect when he sees one.

He probably had his mind on other things, however, as he briefed analysts and investors on Weir's own results.

Analysts at Espírito Santo Investment Bank highlighted Weir's lower operating profit margin. This fell to 17.6 per cent in the first half of this year from 18.1 per cent in the same period of 2013.

The analysts said the decline in the profit margin was "slightly concerning". However, they also cited the positives in Weir's results.

Revenues, although down on the first half of 2013, met expectations.

And Weir produced figures showing that, excluding exchange rate movements, order input in the six months to July 4 was up 10 per cent on the first half of last year at £1.24 billion. It also highlighted the impact of the pound's strength, against currencies including the dollar, on its profit figures. Specifically, it calculated that pre-tax profits in the six months to July 4 were up seven per cent on a constant currency basis which excludes the impact of foreign exchange movements.

This is a fair achievement in what have not been the easiest of market conditions, notably in terms of the mining sector on which Weir depends for a very large part of its business.

Weir acknowledged operating profits in its minerals division, which supplies mining companies with heavy-duty kit including slurry pumps as well as spares, were in its first half not only down on the same period of 2013 but also behind original expectations. It highlighted the impact of industrial turmoil in South Africa.

Original equipment orders for the minerals division declined, with Weir citing the absence of greenfield projects and customer caution in committing to brownfield expansions.

However, it noted that, in spite of the effects of industrial action in South Africa, after-market orders had continued to grow, and this is surely encouraging. Another positive was news of an acceleration of the recovery in upstream North American oil and gas markets. Weir has in recent times positioned itself to capitalise on opportunities in the North American shale arena through significant acquisition and investment activity.

And, while Weir may have disappointed the City with its results, we should keep things in context.

The fall in Weir shares left them standing at £25.67 last night, down 101p on the day.

The shares were trading around £27.50 only last week.

However, on November 4 last year, when Weir issued its first profits warning since Keith Cochrane became chief executive in November 2009, the company's shares ended the session at £21.73. Weir shares were trading at around 700p when Mr Cochrane became chief executive. For a while in late 2008, amid the global economic downturn, they traded below 300p.

Weir has come a long way since then, having achieved promotion to the UK's prestigious FTSE-100 index of leading shares in September 2010 and added significantly to its stock market worth since. In spite of the sharp fall in Weir's shares since early last week, the company still had a stock market worth of about £5.5 billion last night.

In 1999, Weir rejected a 300p-a-share bid approach from US sector stablemate Flowserve Corporation which valued the Scottish company at just £611 million. Weir shares had in early 1999 traded below 200p.

Weir's decision to reject Flowserve has certainly been vindicated. Metso may now feel even more justified in having rejected Weir, which made an approach valuing the Finnish group at about €4.5 billion (£3.6 billion).

And Mr Cochrane will likely be under some pressure from the City to deliver a big deal. However, although Weir shares fell as Metso stock surged after the companies unveiled results, the Scottish group's top brass should not lose sight of the fact their first-half figures were respectable enough in a difficult climate, or of their achievements over the years.

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