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Why Are Balfour Beatty plc And Connect Group PLC Rising Today?

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Balfour BeattyTroubled construction firm Balfour Beatty (LSE: BBY) rose by 10% in early trading this morning, while newspaper distribution firm Connect Group PLC (LSE: CNCT) gained 17%.

What’s the story?

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Balfour Beatty

Balfour has produced a string of profit warnings recently and has been without a permanent chief executive since May.

That’s now changed, as Balfour announced this morning that Leo Quinn, who is currently chief executive of defence firm QinetiQ, will be starting work as Balfour’s new chief executive on 1 January 2015.

Is Balfour now a buy?

Mr Quinn faces a tough challenge turning around Balfour’s core UK construction business, which is currently riddled with loss-making contracts.

Even in the good times, Balfour has always been a low margin business, with operating margins of around 2.5%. While the sale of Balfour’s Parsons Brinckerhoff business will bring in some much-needed cash, it will also highlight the firm’s low profitability.

In my view, the majority of Balfour’s value lies in its public-private partnership property portfolio, which is worth around 150p per share. At present, paying more than this seems unjustified, in my view.

Connect Group

Connect Group’s main business is newspaper and magazine distribution. The firm also distributes books and educational supplies. As you’d expect, it’s a high turnover, low margin business, but the firm’s valuation has reflected this — until this morning, Connect traded on a forecast P/E of just 7.

Today’s full-year results beat expectations, with underlying earnings of 21.7p per share versus consensus expectations of just 20.4p. The firm’s shares have gained 17% to 161p this morning, although remarkably all this has done is to maintain the company’s low valuation, as it equates to an adjusted trailing P/E of 7.5.

Connect’s big attraction is its yield — the firm’s full-year dividend of 9.7p equates to a yield of 6% at today’s share price, making it a potentially attractive choice for income seekers.

However, Connect’s balance sheet isn’t that strong, in my view. Its current assets do not cover its current liabilities (a standard test of balance sheet strength) and it has a significant level of debt, plus a moderate pensions deficit.

Overall, I think Connect’s valuation is fair, but I’d like to see a stronger balance sheet before considering a buy.

A better choice?

Finding shares with good upside potential in today’s weak market isn’t easy. Frankly, if you’re looking to invest new money today, I’m not sure either of these companies are the best choice.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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