This small-cap offers a possible P/E of 7 and 5.5% yield.
It should come as no great surprise to learn that a company providing engineering expertise to the UK's public sector has had a tough year.
And when you add a little Libyan exposure into the mix as well, it's even less of a surprise when the firm tells us that theirs is not the happiest of camps at the moment.
Such is the case for engineering consultancy WSP Group (LSE: WSH), which specialises in property, transport and infrastructure, and employs 9,000 staff throughout 200 worldwide offices. The firm's share price has fallen from a November high of 400p to its current level of 272p, which supports a £174m market cap.
Whether WSP is a falling knife is something of a moot point. The price certainly plunged a little on recent news that things were tough out there -- but not tough enough to completely finish off its unfortunate shareholders. And I quite like a falling knife which meets the right credentials.
What really hit the price for six was when WSP told us at the end of June that things weren't going so well.
Around 30% of the company's sales are generated in the UK, where public-sector cuts are hurting even more than anticipated -- particularly in transportation. The company also said it will make an exceptional provision of £5m due to the turmoil in Libya.
On the other hand, WSP is seeing a gradual improvement in the UK private sector and the group will be taking further cost-cutting action, too. Furthermore, in the relatively strong economy of Sweden, which accounts for a third of all business, things are going swimmingly.
Back to basics
The basic fundamental valuations stack up reasonably well here -- though WSP is not a play on assets, as we're into negative balance-sheet territory when all the intangibles are excluded. Mind you, net asset value including goodwill outstrips the overall market cap and a large chunk of goodwill is often an accounting fixture at such international consultancies.
Anyway, WSP does look appealing on a combination of earnings, cash flow and the potential for recovery.
City brokers have earnings per share of 34p pencilled in for the current year, rising to 37p next – so placing the shares on a forward price-to-earnings ratio of about 7.
This stacks up reasonably well against WSP's recent history. In the relative boom times for construction as well as public sector largesse, the company brought in earnings of over 49p in 2008, falling to around the 40p mark in the last couple of years.
So even a partial recovery would make the shares look good value. Meanwhile, the historic and anticipated annual dividend of 15p means the shares are yielding a very respectable 5.5%.
It's really all about earnings
But a decent and sustained rally in the share price will really only come with increased earnings going forward. On that score, WSP is a difficult one to gauge.
A lot of what WSP specialises in within the UK is essential in nature. Public-sector contracts may be deferred temporarily, but most of the work has to be done by someone at some point in the not-too distant future.
In other words, we could see something of a rally when our public-sector finances are in better shape, and we already know the key market of Sweden is strong for WSP. Furthermore, I'm hopeful the company's geographic and sector diversity, and ability to cut costs, should see it survive any further downturn.
WSP's share price has, understandably, lagged its peers markedly of late. If I was a betting man – which I am! – I'd wager the company will redress this underperformance during the next couple of years.
But the interim results for the six months to the end of June, due to be announced on 25 July, won't be pretty, so it may be that a jittery market provides us with a better opportunity yet.
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