|Shares Out. (in M):||150||P/E||13.5x||17.4x|
|Market Cap (in $M):||3,668||P/FCF||40.0x||n/m|
|Net Debt (in $M):||603||EBIT||400||350|
|TEV (in $M):||4,289||TEV/EBIT||10.7x||12.2x|
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Metso – Short Recommendation
I am recommending a short position in Metso OYJ common stock (Bloomberg Ticker: MEO1V FH) currently trading at EUR 24.40 per share. Metso is a Helsiki based global supplier of process industry machinery and systems. Its two largest end markets are mining (55% of sales) and construction (18% of sales). Please refer to the company’s corporate website for a more detailed description of their business: www.metso.com
On July 29, 2012, gs0709 recommended Metso stock as an attractive short to play a peak in global mining capital expenditures. Please refer to his write up for background on the thesis which I believe continues to be valid. Since the initial write up in VIC, Metso has generated a positive total return of +6% (negative 6% for the shorts) versus a +27% return for the BE500:IND (index of 500 most liquid European stocks). I believe right now is a very opportune time to revisit the idea as the stock has rallied around the spin off of Valmet, it’s pulp and paper business.
The company recently spun out its higher quality pulp and paper business, Valmet. In the weeks prior to the spin, Metso rallied almost 20% based on optimism around the potential restructuring of the legacy business. Management, presented its intention to attain aggressive long term profitability targets. Please see the January 9 SEB Enskilda Nordic Seminar on the company’s investor relations website for further details. However, I see room for significant downside in the next twelve to eighteen months as the thesis that gs0709 outlined in 2012 continues to play out and actually accelerates.
Although negative earnings revisions for Metso have been ongoing since the second half of 2011, I see the trend accelerating over the next twelve to eighteen months. My bottoms up analysis suggests that consensus earnings estimates are still 20%-40% too high for 2014 and 2015. While one should expect an expansion of multiples at the bottom of a cycle, Metso, at today’s valuation of 18-20x my 2015 estimates appears richly valued on an absolute and relative basis. In addition to cyclical headwinds, there is evidence that competition in Metso’s end markets is increasing, creating potential for secular pricing pressure down the road and a further de-rating of the stock. The deterioration of certain balance sheet/cash flow items evident in the past couple of quarters also suggests that the company may be struggling to meet earnings. In my view, earnings revisions combined with a few points of multiple compression could generate 20-40% downside in the stock over the next twelve to eighteen months.
Large Exposure to Mining Capex in the Midst of a Downturn
Negative Operating Trends and Negative Accounting Trends
Increasing Competition Poses Long Term Secular Threat
Valuation & Pathway to Estimates Revision
Risks to short
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