One construction turnaround stock I’d sell and one I’d buy

These two stocks in the same sector have very different outlooks.

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Shares in Carillion (LSE: CLLN) plunged by more than a third yesterday (and are down a further 14% today at the time of writing) after the company issued a dire profit warning, suspended its dividend and announced that the group’s current CEO is leaving the business. What’s left of management has now started a strategic review, is planning an exit from non-strategic markets and will be reducing debt.

Fortunately, yesterday’s warning will not have come as a surprise to those who follow Carillion. There have been rumours that the company would issue a profit warning for some time. Indeed, it has been the London market’s most shorted stock for more than six months, and over the past 12 months, almost all of its peers have issued similar profit warnings. Many traders believed it was only a matter of time before it followed suit. 

After yesterday’s declines, shares in the company have lost around 70% since their 2014 high, excluding dividends. Dividends have softened the blow slightly with returns including dividends at minus 51%.

More losses ahead?

They say history doesn’t repeat itself, but when it comes to outsourcers, almost all of the UK’s listed firms have issued multiple profit warnings over the past 24 months, and I don’t think this will be Carillion’s last. As the company untangles itself from legacy contracts, there may be further pain for shareholders ahead. Moreover, as it sells non-core assets, revenue will decline further, and a new initiative to be “highly selective” in taking on new contracts and doing so via “lower risk” routes may mean the business will never return to its former size. 

Also, with the future uncertain, City forecasts are mostly redundant until the company can get its house in order.

Carillion’s construction business could have benefitted from some of the large infrastructure projects currently underway in the UK, but now the company’s problems are public, it may be best to avoid the firm.

A better buy? 

On the other hand, peer Morgan Sindall (LSE: MGNS) might be a great alternative pick. It provides specialist infrastructure and design services, as well as property services such as strategic asset management and cyclical maintenance to social housing providers.

Business has taken off in recent years, and the company’s shares have responded well, gaining 121% over the past 12 months. That said, over the previous five years, earnings per share have remained relatively static, falling from 92p in 2012 to 85p for 2016. Over the same period, revenue has grown from £2bn to £2.6bn. Over the next two years, City analysts expect the group’s earnings per share growth to pick up, with growth of 15% pencilled-in for 2017, followed by 10% for 2018, taking earnings to 107.4p per share. 

Based on current forecasts, shares in Morgan trade at a forward P/E of 12.7, which looks cheap considering the company’s projected earnings growth.

During the next two years, analysts are also expecting management to hike the company’s dividend payout per share by around a third or 10p to 44p. The shares currently support a dividend yield of 3.2%.

With double-digit earning growth pencilled-in for the next two years, Morgan looks to be a much more attractive investment than Carillion. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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