QinetiQ’s (LSE: QQ) shares are falling today after the company’s CEO, Leo Quinn, defected to struggling construction group Balfour Beatty. As QinetiQ slumps, Balfour’s shares have jumped on the news.
Impressive record
Mr
Quinn was responsible for turning QinetiQ’s around, which is why investors are dumping the company’s shares following the news of his departure. Indeed, Mr Quinn arrived at the company during a time of falling defence spending around the world and he quickly got to work.
After joining the group during 2009, QinetiQ’s then-new CEO started an aggressive turnaround plan and it seems to have worked. Since September 2009 QinetiQ’s shares have jumped 70%. Earnings per share have risen 44% over the same period.
Nevertheless, Mr Quinn will have his work cut out at Balfour. The construction company has been struggling for around two years now, issuing its fifth profit warning within 24 months during September. This latest profit warning was accompanied by the news that management had discovered a £75m “shortfall” in the group’s books.
What should you do?
It seems as if the market believes that now Mr Quinn has left QinetiQ, the company will struggle. What’s more, before today’s slump QinetiQ’s shares were trading at a forward P/E of 15.4, a valuation which did not leave much room for disappointment.
QinetiQ’s shares have now fallen to a less demanding valuation of 13.6 times forward earnings but this is still a valuation that does not leave much room for error. The company’s dividend yield of 2.1% is attractive, although better yields can be found elsewhere.
Nevertheless, Mr Quinn has left a lasting legacy at QinetiQ. The company is now slimmer and more streamlined than it was when he took over. Underperforming non-core divisions have been sold off to reduce debt and fund share buybacks, while the company is now a trusted partner to government organisations, predominantly in the UK and the U.S.
So it looks like QinetiQ should continue to function without its transformational leader.
Running out of cash
On the other hand, Mr Quinn has a lot of work to do before he can claim to have successfully turned Balfour around.
That said, returning to Balfour as CEO takes Mr Quinn back to his roots. He started his career as a civil engineer at Balfour and believes that the company has all of the building blocks in place to make a recovery.
But with Balfour’s profits collapsing, the company is now facing the prospect of a default if it cannot complete the sale of its American division, Parsons Brinckerhoff. If the sale does not go through, then the company could be forced to ask investors for extra cash to avoid insolvency. Balfour’s dividend payout could also be for the chop.
