What does Worley do?
Worley Parsons [ASX:WOR] is a contract engineering company primarily providing services to the oil and gas industry.
What’s happening to WOR’s share price?
Today, WOR’s share price plunged more than 15% on the back of its half year earnings announcement. Underlying earnings after tax fell 22.7% to $57 million.
Worryingly, operating cash flow declined $85 million during the half as WOR struggled to collect project revenue from a number of different clients. That contributed to a $136 million decline in WOR’s cash balance.
What now for Worley Parsons?
Worley benefits from rising capital expenditure in the oil and gas sector. While energy prices have increased strongly from their lows of 2016, it takes some time for higher prices to flow through to investment in new projects.
As you can see in the chart below, the market started to price in a recovery in capital investment for the energy industry and WOR’s earnings. The stock rallied from a low of $3 in February last year to around $10.40 in January.
That’s a rally of nearly 250% in 12 months.
A rally like this doesn’t leave much room for disappointment.
If earnings growth doesn’t come through as expected, the share price will suffer. That’s exactly what happened today.
WOR’s share price simply got ahead of its earnings. The industry is only just recovering from a massive bear market and reduction in investment in new projects. It will take some time to come back to ‘normal’ (whatever that is) and benefit WOR.
Today’s share price reaction tells you to be very wary of buying WOR at this point. Sharp falls on the back of an earnings announcement means the news is much worse than expected. And given WOR trades on a price-to-earnings multiple of 17 (which is above average) it’s not a cheap stock.
The poor earnings announcement, combined with the damaging price chart, tells you to avoid WOR for the time being.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.
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Editor, Money Morning