The Balfour Beatty (LSE:BBY) share price took quite a tumble this week following its latest earnings report. The construction company saw its stock fall by around 8% in the first 30 minutes of trading on Wednesday. And it has since continued its downward trajectory to around 286p today. Despite this recent drop, the stock is still up by 22% over the last 12 months. So, is this actually a buying opportunity for my portfolio? Or is there trouble ahead? Let’s take a closer look.
A relatively positive trading update
Looking at its recently published interim report, Balfour Beatty has managed to deliver decent results in my opinion. Revenue for the last six months came in almost flat at £4.15bn versus £4.12bn a year ago. But encouragingly, profitability has returned, with net income for the period standing at £52m versus a loss of £20m in 2020.
The return of positive cash flows is undoubtedly a pleasant sight after all the disruptions caused by the pandemic. And the management team seems to have faith in the future potential of the business. Why? Because the firm has successfully repurchased £99m worth of shares and increased the dividend to 3p per share. That’s 43% higher than in 2019.
So why did the stock fall? The lack of revenue growth is disappointing. But it’s not the primary catalyst behind the tumbling share price.
Why is the Balfour Beatty share price dropping?
Despite being a construction company, its construction operations are not doing very well. In fact, its UK construction division reported a £23m loss over the last six months. While its US counterpart has managed to stay ahead, most of the new-found profitability originated from the firm’s support services.
The group predominantly works on public infrastructure. However, some of its order book comprises private residential properties. And unfortunately, those located in central London have turned into a nightmare. These contracts are almost always fixed-price. So, if the cost of materials suddenly spikes or the project isn’t finished on schedule, Balfour Beatty has to absorb the extra expenses.
With the pandemic causing lumber and metal shortages, Brexit increasing the cost of importing materials, and 2020 lockdowns putting the brakes on construction projects across the country, most of the firm’s London-based private residential contracts have turned into money-losers. Needless to say, that’s not good news for Balfour Beatty’s share price.
After seeing such a poor performance, the company has decided to no longer bid on any fixed-price residential property projects in London. Instead, it will focus its efforts on expanding its line-up of public infrastructure projects. Personally, I think this is a sensible idea given the current environment. Plus, with both the UK and US governments initiating substantial investments within public infrastructure, the business should be more than capable of making up the lost income. At least, that’s what I think.
All things considered, the Balfour Beatty share price looks like it still has plenty of long-term growth potential. Therefore, to me, the recent fall looks like a buying opportunity for my portfolio.
Zaven Boyrazian has no position in any of the 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.