Down 80%, is it time to reconsider Wood Group shares?

Wood Group shares surged in morning trading after the engineering firm raised guidance as it reported better-than-expected revenue in H1.

| 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.

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper

Image source: Getty Images

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.

Wood Group (LSE:WG.) shares pushed upwards on 22 August following a positive trading update. The engineering and consultancy firm posted better-than-expected adjusted H1 earnings. This also led management to say that annual profit would be ahead of forecasts.

So, having fallen 80% over the past five years, is it time investors reconsidered Wood Group?

Valuation

The share price has collapsed in recent years. The FTSE 250 company had suffered from a couple years of diminishing growth before refocusing its efforts on the renewables sector. It then went on to sell its Environment and Infrastructure business. More recently, we can observe a price spike associated with an abandoned takeover by Apollo Global Management.

This falling share price has meant that the company’s valuation relative to its sales and earnings looks more attractive. The table below highlights some relative valuations versus the energy industry.

Wood GroupEnergy Average
EV-to-sales (TTM)0.381.98
EV-to-sales (Forward)0.362.22
EV-to-EBITDA (Forward)5.15.9
Price-to-book0.351.7

Wood Group’s relative valuations indicate a more attractive positioning compared to the broader energy sector. This could potentially present an opportunity for investors seeking relatively more favourable valuation metrics within the industry.

However, it’s worth highlighting that it’s not strictly fair comparing Wood Group with all energy companies. That’s the case for any comparison within the industry. For example, oil majors have a very different business model and profit margins.

Positive momentum

The favourable trading results could be a pivotal moment for the share price of the Aberdeen-based company. Looking ahead, Wood Group anticipates that the adjusted core earnings margin will remain relatively stable in the short term, hovering around 7%.

This projection is influenced by ongoing business investments. The adjusted EBITDA margin actually fell from 7.2% last year to 6.8% in the first half of 2023.

Furthermore, the firm stated that while its adjusted EBITDA for the whole of 2023 is exceeding initial expectations, it now aligns with its medium-term goal of mid-to-high single-digit growth. This strategic focus on sustained growth is significant as investors are rightfully concerned about committing to stocks lacking a well-defined growth path.

The improved financial figures also have a positive bearing on the company’s debt situation. The ratio of net debt to adjusted EBITDA currently stands at two times, marking a notable improvement from the previous year’s figure of four times.

This favourable shift in debt metrics underscores the company’s efforts to manage its financial obligations more effectively and could potentially contribute to enhanced investor confidence.

Out of the Woods?

The update undoubtedly casts a positive light on the situation. Nevertheless, it’s important to acknowledge that debt levels could become challenging should performance dip once again. Meanwhile, it’s worth highlighting that the company’s profitability has been mixed over the past five years.

With these considerations in mind, investors might be prudent to approach the situation with caution. However, the current share price is certainly enticing.

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.

James Fox 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.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »