UK engineering shares slip on oil woes ahead of Fed decision

If in doubt, sell FTSE 100 industrial shares.

That was the (not entirely convincing) logic on the face of a deep sell-off in UK industrial engineering stocks on Thursday.

The machine sector rout was levered off by a profit warning from relatively obscure mid-cap Rotork.

Shares of Rotork, which makes valve-automation equipment, fell as much as 16%.

It had warned earlier that it now expected full-year revenue of £530m to £555m.

That is short of the average analyst forecast of £571.3m.

Rotork’s close peers had a similarly tough time on Thursday.

Virtually all LSE engineering and machinery shares, from Smiths Group to Weir, to Rolls Royce fell between 2%-3%.

Construction-focused Ashtead was down 1.3%.

Oil slip

However lurking beneath Rotork’s declines, and those of its peers, which have taken the FTSE 350 Industrial Engineering Index down 13% year-to-date, were much more familiar concerns.

The equipment Rotork supplies is used in the oil and gas, power and nuclear industries.

The outlook for oil and gas companies remains grim.

Rotork’s energy industry clients have already cancelled around $200bn in investments due to weak oil prices, and more cuts are all but inevitable.

Whilst there have already been sharp downgrades in production and services companies directly exposed to oil, equipment suppliers can be perceived as ‘later-cycle’.

The attempted recovery of crude oil prices between March and July probably delayed investor capitulation from indirectly exposed sectors further.

But oil’s fall last month to its lowest since early 2009 at just above $40 a barrel dashed hopes for a swift recovery.

In turn, this sharpened the focus on financing concerns for small-to-medium-sized oil firms which make up a considerable proportion of equipment suppliers’ client base.

Given that banks often lend money to crude oil sector companies based on oil and gas reserves, the weak oil price outlook may equate to lower credit.

The Federal Reserve’s interest rate announcement tonight adds a further dimension to financing for companies with the most challenged credit ratings.

Inevitably there are many in exactly such a condition in the global mid-cap oil sector.

Whilst, in all probability the FOMC will not hike tonight, jitters are still in the air.

Hence investor sensitivity is heightened.

Therefore, it’s an even more unfortunate time for ‘downstream’ companies to announce profit warnings.

Rotork stock scenarios—and further weakness among its rival engineers would probably be intensified in the unlikely event of a Fed hike tonight.

But even the lack of a US rate hike doesn’t seem likely to prevent their shares from sliding more in the near term.

For Rotork stock, Thursday’s collapse broke through 50% of the rise from its November 2008 low to its all-time high of 310p in March 2013.

Few strong supports appear to be close.

This could leave the descending line from June of the same year, which ROR also snapped on Thursday, as one of its last remaining hopes.

If these levels fail—and the chances are that they will—the likeliest next support could be a 61.8% interval down at 155.43p.

That’s about 19% lower than Rotork’s close at 192.66p.

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