Richard Howson, the chief executive of infrastructure and support services group Carillion (LSE: CLLN), must be smiling today.
It’s nearly a year after the firm’s failed attempt to merge with Balfour Beatty (LSE: BBY), and it seems pretty certain that Carillion had a lucky escape.
Since the failed negotiations last year, Balfour has stumbled from one problem to the next.
In contrast, Carillion has made steady progress with its strategy of focusing on controlling costs and targeting high-quality projects.
In a trading statement released on Tuesday, Carillion reported that profits and earnings were expected to be in line with expectations this year, and said that there had been a “significant increase in first-half revenue”.
Carillion also took the opportunity to announce an £80m contract to build an operational and accommodation complex for BP in Oman, which is expected to start in September and complete in mid-2017.
More losses for Balfour
In contrast, Balfour’s most recent update, issued on 9 July, revealed that the company has identified yet more problems with existing contracts. These are expected to result in pre-tax profits being between £120m and £150m lower than expected this year.
The firm’s only profitable and healthy business, the Parsons Brinckerhoff consultancy, was sold in October 2014. While the cash helped to strengthen Balfour’s balance sheet, I suspect this sale may seem short-sighted in years to come.
Of course, it’s possible that Balfour will prove to be a successful contrarian buy, outperforming Carillion over the next year.
It’s possible, but I’m not convinced. Here are three reasons why I’d be inclined to sell Balfour and buy Carillion at today’s prices.
Balfour looks too expensive. In my view the current share price already factors in a successful recovery.
Balfour currently trades on a 2015 forecast P/E of 25, falling to a P/E of 15.3 for 2016. In contrast, Carillion trades on a forecast P/E of 10.4 for 2015, falling to 10.0 in 2016.
Although this implies that Carillion’s growth is likely to be limited next year, I’d rather take this risk than expose my money to Balfour’s toxic cauldron of loss-making contracts.
Growth may be plodding at Carillion, but the firm’s shares offer a well-covered 5.2% dividend yield.
Carillion’s dividend has risen every year since 1999, climbing by 344% from 4p per share, to last year’s level of 17.7p per share.
In contrast, Balfour’s dividend was cut by 60% from 14.1p to just 5.6p in 2014. A further 45% cut to 3.1p is forecast by analysts for 2015. Balfour also cut its payout in both 1999 and 2000.
Carillion’s slow and steady approach may be boring, but it has been very profitable for long-term shareholders.
Even during the good times, Balfour Beatty’s operating margin didn’t make it much higher than 3%. As we’ve seen over the last two years, this leaves precious little room for errors or unexpected problems.
In contrast, Carillion’s mix of infrastructure and support services is more profitable. The firm’s operating margin has average 4.3% since 2009 and was 5.4% in 2014.
It’s a simple choice
For me, it’s there’s no contest. I’d be happy to put my money into Carillion’s well-run and stable business, but will continue to avoid Balfour Beatty.