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Is Carillion plc a stock to avoid after news of FCA investigation?

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Troubled support services company Carillion (LSE: CLLN) declined by another 4% on Wednesday after it announced that it is the subject of an FCA investigation. It is in connection with the timeliness and content of announcements made by the company between 7 December 2016 and 10 July 2017.

Clearly, investor sentiment has been negatively impacted by the news. In the short run, there is the potential for further declines as the market digests it all. However, in the long run is the company a stock to avoid, or a potential turnaround play?

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Long-term potential

While the last year has seen the company’s share price decline by over 90%, things could improve for the stock in the long run. Major changes are ongoing at the business right now, with a new CEO likely to implement a refreshed strategy. This could involve a refocus on core operations, with an asset disposal programme already under way. Alongside an efficiency programme, this could improve the long-term prospects for the business and help to create stronger financial performance in future years.

Short-term difficulties

However, in the short run there appear to be major challenges ahead. The end of April could be a key period for the business as it is when it must meet the banking covenant tests which were deferred from the end of 2017. If they fail to be met then it may mean that a fundraising is required in order to boost the financial strength of the firm. While this has the potential to be successful, there is no guarantee.

In the meantime, the trading conditions for the company remain tough. And with the FCA investigation now ongoing, investor sentiment could worsen in the near term. But with the stock now trading on such a low valuation, its potential rewards remain high. Therefore, for investors who can cope with the potential for loss and for high volatility, Carillion could still be an attractive buy.

Successful comeback

Of course, there are other support services companies that have been the subject of FCA investigations. Sector peer Mitie (LSE: MTO) announced in August that the FCA was to investigate the timing and content of a profit warning. While this may have held back investor sentiment to some degree in the months following the announcement, the stock could have turnaround potential.

Mitie is now expected to report a rise in its bottom line of 34% in the next financial year. Under new leadership, it seems to have put together a strategy which could allow it to deliver sustained profit growth over the long run. And with its shares having declined in recent months, it now trades on a price-to-earnings growth (PEG) ratio of just 0.3. This suggests that it may offer a relatively enticing risk/reward ratio.

Certainly, Mitie is a relatively high-risk stock. It continues to face an uncertain future. But for long-term investors who are comfortable with a volatile and challenging outlook, the rewards could be high.

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Peter Stephens owns shares in Carillion. 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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