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

Could Carillion plc (LON: CLLN) fall further after news of potential regulatory issues?

| 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.

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?

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.

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.

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.

More on Investing Articles

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Is BT Group one of the FTSE 100’s greatest value shares?

BT's share price looks like a bargain when you look at the P/E ratio and dividend yield. Is it one…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

The National Grid share price just plunged another 10%. Time to buy?

The National Grid share price is one of the FTSE 100's most stable, and nothing much happens to it? Well,…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 15% in 3 months, but I still won’t touch Vodafone shares with a bargepole

Harvey Jones has been shunning Vodafone shares for years. The FTSE 100 stock is finally showing signs of life, but…

Read more »

Growth Shares

This UK stock could be like buying Nvidia in 2021

Jon Smith thinks he's missed the boat with Nvidia shares, but flags up a UK stock that has some very…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The FTSE 100’s Intertek delivers a bullish update — can the share price soar?

I’d describe Intertek as a quality business with a decent dividend income, but will the share price shoot the lights…

Read more »

Market Movers

Up another 10% yesterday, how high can the Nvidia share price go?

Jon Smith talks through the latest results but flags up why further gains could be harder to come by for…

Read more »

Investing For Beginners

Down 43% in a year, I think this value stock is primed for a comeback

Jon Smith flags up why a FTSE 250 share has fallen so much in the recent past, but explains why…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Nvidia stock is stupidly expensive. Or is it?

Nvidia stock's up over 2,000% in the past five years. Christopher Ruane explains why it could be wildly overvalued --…

Read more »