Caution: could this share one day go the way of Kier Group?

Why I think I’d be nuts to make this one a long-term hold, despite a rosy outlook now… just like Kier Group plc (LON: KIE) once enjoyed.

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Since I last wrote about structural steelwork company Severfield (LSE: SFR) in January 2017, the stock’s performance has been disappointing.

Back then, the share had been moving up and it looked like we would enjoy a prolonged cyclical recovery from the stock with ongoing rises in the share price and the dividend. Indeed, the dividend has risen around 23% over the past two and a half years. The share price, however, is down just over 13%.

Volatility assured

Over the period, adjusted earnings have been moving up, and cash flow from operations has been grinding down. Overall, we’ve seen a lacklustre outcome since my previous article.

In January 2017, operations were recovering after the firm’s Rights Issue four years earlier. The re-financing was necessary because profits had collapsed and Severfield needed to pay off its debts to fix the balance sheet. The steel business is highly cyclical and a plunge in earnings, dividends and the share price is normal every so often for this type of company.

But sometimes owning shares like this during the cyclical up-leg can prove to be lucrative. However, the performance of Severfield’s shares since January 2017 proves how difficult it can be to time the cyclicals.

A mixed bag of financial figures

Today’s full-year-results report to 31 March reveals revenue was essentially flat compared to the previous year and underlying earnings per share rose 5%. But cash flow from operations dropped by 23%. Meanwhile, cash and equivalents on the balance sheet fell by 25%. But the firm used a lot of cash to pay dividends, including a special payment of 1.7p per share, on top of the ordinary dividend for the previous year.

There’s no special dividend payment this year, although the directors pushed up the total ordinary dividend by 8%. Indeed, chief executive Alan Dunsmore sounds upbeat in the report. The order book is up, and he explained it contains a healthy mix of projects across a diverse range of sectors and we have made strategic progress in the UK, Europe and India.”

Everything looks rosy, but…

Dunsmore reckons there’s “considerable” momentum in operations which provides a “platform for further operational and strategic progress.” But I’m cautious. With cyclical firms, the storm often follows the heatwave. Just when everything looks rosy in the garden is when cyclicals are at their most dangerous for shareholders, in my view.

I’m mindful of the recent example of Kier Group and my cautious article about that firm when everything looked promising back in September 2017. Sadly, I was right to be worried about Kier.

Meanwhile, the lack of recent progress for Severfield’s shares strikes me as a negative sign. I think I’d be nuts to try to make this one a long-term hold, and it seems to me that the up-leg trade could have failed. I’m avoiding the share.

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.

Kevin Godbold has no position in any share 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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