The mining industry has been in a “prolonged downturn,” as this Reuters story reports. Miners are looking to cut production and shut down unprofitable operations – and industry suppliers such as Finland’s Outotec Oyj (OTE1V.HE) are feeling the crunch.
For more on this report watch the corresponding video here.
Outotec provides process solutions, technologies, and services for mining and metal processing. The company’s revenues have been falling and it also does not seem to have strong earnings quality. It earns a StarMine Earnings Quality (EQ) model score of 5, which means that current earnings may not be coming from sustainable sources. It’s never a great sign when the CEO starts the earnings conference call like this : “As you can, of course, see from our quarter one order intake, the uncertainty in the market continued.”
Source:Thomson Reuters Eikon/StarMine
No gold in free cash flow
Outotec has seen negative free cash flow in five of the last six quarters. In fact, the last fiscal year will have the largest negative free cash flow in five years. When earnings are not backed by strong cash flow, it indicates poor earnings quality. Outotec has seen four consecutive quarters (year over year) of revenue shrinking, with the latest December quarter revenues declining by more than 31%. If that trend in falling revenues persists, it’s likely to mean poor earnings going forward.
Source:Thomson Reuters Eikon/StarMine
Inventory management down the shaft
Outotec has not been doing a good job of managing inventory, with the current 59 inventory days representing a five-year high At a company like Outotec, growing inventories could lead to write downs as inventory becomes outdated. Inventory management in a falling revenue environment is always difficult and Outotec will need to do a better job at this. On the other hand, if the company reduces inventories, and business picks up, it may not be able to meet demand.
Source:Thomson Reuters Eikon/StarMine
Outlook hits a rock
As you can see in the chart above, by most StarMine models, Outotec is performing poorly. The company scores a 1 (the lowest possible score) on the StarMine Value-Momentum model, which is the most comprehensive StarMine model that takes into account both momentum and valuation factors.
Analysts do not seem terribly optimistic either as there are 10 sell and strong sell recommendations as opposed to just three buys and strong buys. However, Outotec is not cheap. The forward 12M P/E is 21.7 compared to the 10 year median of 15.6. Given that the company has such poor earnings quality, maybe the market is expecting it to be the target of an acquisition. There’s a distinct lack of alchemy in its earnings outlook.
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