Mining Services: Blood in the water

Might look bad now, but could be about to get a whole lot worse

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published May 21, 2013 11:20 am AEST

The end of the resources boom is having a profound effect on the companies that service the resources and energy sectors. Several companies have now released profit downgrades, and it doesn't appear to have finished just yet.

Today it was Transfield Services' (ASX: TSE) turn, which saw the share price smashed down more than 20%, after the company slashed its 2013 profit forecast to between $62 and $65 million, and that number doesn't include amortisation charges and writeoffs. Transfield blamed the slowdown in the mining and resources sector, and pressure from customers to cut costs and charges.

Yesterday it was Fleetwood Corporation's (ASX: FWD) turn, after the temporary accommodation and caravan builder cited the softening resources sector, and an oversupply of accommodation in Karratha, would result in second half earnings falling below those reported in the first half.

In the past week or so, we've seen Worleyparsons (ASX: WOR), UGL Limited (ASX: UGL), Coffey International (ASX: COF), Sedgman (ASX: SDM), GR Engineering Services (ASX: GNG) all announce profit downgrades. That follows profit downgrades last month from Ausdrill Limited (ASX: ASL), Emeco Holdings (ASX: EHL) and Calibre Group (ASX: CGH).

Of course they aren't the only mining services companies, with the likes of Monadelphous Group (ASX: MND), Forge Group (ASX: FGE), Clough Limited (ASX: CLO) and ALS Limited (ASX: ALQ) yet to provide an update on their earnings. That hasn't stopped the market expecting the worst, with many of them heavily sold off.

Since the start of this year, the mining services sector as a whole is down more than 30%. Perhaps the only sector you could've lost more money in was the gold miners. With capital expenditure in the resources space set to peak this year, and big miners announcing plans to severely curtail costs, delay projects and cancel others, next year could be even worse for the mining services sector.

Foolish takeaway

Many investors may be looking at the recent price falls and perhaps thinking there are some bargains to be had. Our view is that the shares could still fall a long way from here. Rather than being bargains, many look like value traps and investors might want to avoid the mining services sector for some time yet.

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