FTSE 250 incumbent Balfour Beatty (LSE:BBY) had a 2020 to forget thanks to the pandemic. The stock looks dirt-cheap right now. But its 2021 performance and outlook have picked up. Should I buy shares for my portfolio? Let’s take a look.
Balfour Beatty is a leading international infrastructure group with offices and a presence in the UK, US, and Hong Kong. It employs approximately 26,000 people and has roots stretching back over 110 years.
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As I write, Balfour shares are trading for 245p, which is a 7% drop compared to a year when shares were trading for 265p. More notably, shares have dropped close to 25% since August, when they were trading for 319p. Current macroeconomic pressures seem to have affected the company’s share price and investor sentiment.
For and against
FOR: During the pandemic and since reopening, demand for construction services has been rising. In fact, the UK government has committed to spending £100bn in the next few years on infrastructure. A firm like Balfour Beatty with its experience and huge construction arm should benefit. This could boost performance, growth, and investor returns.
AGAINST: A major issue is that when there is any economic uncertainty, the construction industry is usually affected. It is also worth noting that the construction industry has usually been seen as a low margin sector. With current headwinds such as rising inflation, costs, and the supply chain crisis, market conditions could affect Balfour Beatty’s performance and any investor returns. Other FTSE 250 stocks I am reviewing for investment could suffer at the hands of the same issues.
FOR: Since reopening, Balfour Beatty has shown good levels of performance and I believe these will continue. It released a half-year update back in August that made for good reading. Underlying profit stood at £60m compared to 2020, when it reported a £14m loss. Net cash had increased and its order book was also very close to 2020 levels, which is pleasing to see. I only see this increasing as demand for construction services grows. An interim dividend of 3p was declared, which is higher than pre-pandemic 2019 levels.
AGAINST: Balfour Beatty is in a saturated market and there is lots of competition for the same business and projects. Despite its size and reach, there are still other firms looking to gain the competitive edge and take contracts from it. This could affect performance and any returns I could receive as a potential investor. Competition is something I consider among all my picks.
FTSE 250 opportunity
At current levels, I believe Balfour Beatty is a good opportunity for my portfolio. I would happily add the cheap shares to my portfolio. It has the necessary reach, balance sheet, experience, and fundamentals to navigate difficult waters and return to pre-pandemic levels of performance and growth.
Analysts believe the stock is trading at a forward price-to-earnings ratio of just 12 based on its growth outlook. This is extremely attractive and undervalued in my opinion. It is worth noting not all investors like the construction industry due to its volatility but I am happy to buy shares right now and I expect returns over the long term.