Why I’d sell Carillion plc to buy this stock

Bilaal Mohamed explains why this stock could be a profitable alternative to Carillion plc (LON:CLLN).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s been exactly four weeks since Carillion (LSE: CLLN) dropped its profit warning bombshell onto the market. Now that the dust has settled it’s perhaps a good time to reflect on what has happened, and more importantly what the future could hold for the troubled support services giant.

All-time low

Shares in the Wolverhampton-based facilities management and construction services group plunged to an all-time low last month as investors reacted to a whole host of concerns brought to light in a very worrying first-half trading update. At the core of the announcement was that the company now expects profits for the half to be lower than previously envisaged, with net debt moving in the opposite direction.

The market reacted immediately and the resulting sell-off left the shares trading 39% lower by the end of the day. But it didn’t end there, the shares continued their slide over the coming days, eventually dropping below the £1 mark for the first time since the start of the millennium, and further still to today’s levels just above 50p. It’s hard to believe that Carillion was trading above £2 per share as recently as June – this has been a truly monumental collapse.

Fighting for survival

The FTSE 250-listed group admitted it has a cash flow problem, and with construction contracts drying up, average net borrowing for the first half is now expected to be £695m, much higher than the £586.5m for the whole of 2016. The company also cut its full-year revenue guidance to £4.8bn-£5bn, thus confirming that overall performance would be below management’s previous expectations.

Consequently, the 2017 dividend has been suspended, and the group’s CEO Richard Hawson has stepped down with immediate effect. As you’d expect, the board has promised to undertake a strategic and operational review of the business. But I now see Carillion as a hugely risky investment as it could take a very long time to sort out the problems and get back on track.

Healthy financial position

Another engineering and construction services firm trading on a very humble valuation at the moment is Babcock International (LSE: BAB). But unlike Carillion, I believe the FTSE 100-listed group is the perfect pick for those wishing to take advantage of the company’s established links with the Ministry of Defence.

The financial year has started well, as visibility continues to improve, with around 82% of revenue now in place for 2017/18 and 55% for 2018/19. The order book and bid pipeline of opportunities have remained stable at around £19bn and £10.5bn, respectively, following contract wins.

Unlike Carillion, Babcock continues to maintain a healthy financial position, and expects to further reduce debt during the second half of 2017/18. With the shares currently trading at a four-year low, I believe this could be a great opportunity to snag a bargain at just 10.5 times earnings for the year to March.

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.

Bilaal Mohamed 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.

More on Investing Articles

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

Could Raspberry Pi shares hit £5 by 2030?

After a strong start out of the blocks this month, our writer asks whether Raspberry Pi shares could move further…

Read more »

Close-up of British bank notes
Investing Articles

Five 5%+ yielders I’d buy for an ISA today!

Our writer identifies a handful of FTSE 100 and FTSE 250 firms each yielding at least 5% he'd happily buy…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

5 stocks with 5%+ yields I’d love to buy and hold in a Stocks and Shares ISA

Harvey Jones is keen to add these five FTSE 100 high-yielders to his Stocks and Shares ISA, ideally before they…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d target £880 of passive income annually, spending £10K now on this FTSE 100 share

Our writer explains how he would add to his diversified portfolio happily by investing in this FTSE 100 passive income…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

3 reasons I think the Scottish Mortgage share price could keep rising

Christopher Ruane explains a trio of reasons he thinks the once-mighty Scottish Mortgage share price could be set to increase…

Read more »

Syringe and vial on blue background
Investing Articles

Is this forgotten FTSE share about to make investors rich all over again?

Not long ago, this FTSE share was all the rage before demand dropped off and things went south. Is it…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d use these 5 Warren Buffett approaches to build wealth

Christopher Ruane outlines a handful of investing lessons from billionaire Warren Buffett that he thinks can help a small investor…

Read more »

US Stock

Nvidia stock: 3 things investors need to know as it surges towards $150

Nvidia is a stock that's had an extraordinary run in 2024. Edward Sheldon highlights some important things investors should know.

Read more »