Barloworld - a love-hate commodity story

On April 30, it announced it had completed the sale of its US materials handling business to Briggs Equipment and LiftOne for net cash proceeds of US$60 million. That's around R480 million, around half of attributable earnings.

The cash will be used to repay debt and partially fund a number of growth opportunities. All hunky dory and the share price attracted some significant buying interest before and around this announcement. The only problem is it became a little expensive in the process, effectively setting the company up for a nasty fall just over a week later.

It announced on Wednesday that it expected its headline earnings per share in the six months ended March 2012 to rise between 65% and 75% compared with the same period a year earlier. Demand in the mining sector was driving operating results, while construction activity was also improving in Africa. It all sounded so good, but the share proceeded to drop R7.45, or 7.85%, to R87.50 on Wednesday. The punishment continued on Thursday, down another 3.70% to R84.26.

"On its current valuations, it was not particularly good value," said industrials analyst from Imara SP Reid, Warwick Lucas.

The company comes off an historic price:earnings ratio of 18.26, yet the industrials sector on the JSE has a much lower PE of 13.94 - the higher the ratio the more dear to the market the share price. Its dividend yield, a big ticket item for long-term investors, is also lower than its peers at 1.84%, versus 2.64% for the sector.

"Even with the earnings announcement, [the share price] is not bargain basement," said Lucas.

He said there was always an expectation of strong earnings growth from the company.

"It is not unusual for the likes of Barloworld to be in that space especially since its wellbeing depends on the state of commodity markets."

The relationship between the goods this company provides and demand from the commodity market - which uses those goods in the main - is a very important consideration.

CEO of BHP Billiton Marius Kloppers has warned of volatile mineral prices this year. While cost factors continue to plague miners, any slowing fixed asset development in China remains a concern.

So any slowdown in demand for machinery from commodity companies will feed through on to the sentiment for Barloworld.

But Lucas feels some of the views emerging on the prospects for commodities may be "almost excessively cautious".

Concerns over Greece - in light of the dramatic weekend election turnaround - makes it seem like the commodity cycle may have come to an end, or peaked, he added. He's not convinced.

But copper prices - a key indicator of demand for the entire sector - have fallen to a three week low below $8,000 per tonne in tandem with the euro and the debt jitters after incumbents in Greek and French elections were unseated.

Barloworld's basic earnings per share paint a slightly different story - expected to be 15% to 25% higher than last year's comparable earnings. It is lower than the growth in HEPS, due mainly to exceptional gains in the prior year. The bar had been set high and it was important to determine on what basis you analysed this stock, according to Lucas.

Market watcher Ian Cruickshanks, from Nedbank Capital, said Barloworld's almost 8% decline on Wednesday could be explained by the fact that markets might have been expecting earnings even higher than those announced by the company.

No one seems to doubt the company's prospects are pretty good. But investors can be a fickle lot. It will take time for them to put money down, but they will. It's just more reasonable prices they're after. After the recent sell-off, that's not a long way off either.