Despite largely tracking the performance of the FTSE 100 during the first four months of 2014, Balfour Beatty’s (LSE: BBY) profit warning in early May sent shares in the company tumbling. Indeed, shares in Balfour Beatty were hit by a second profit warning earlier this month and are now down 18% for the year.
However, this week’s news that Balfour Beatty has been awarded a £129 million contract to upgrade part of the M3 motorway could be a catalyst to turn things around. Could shares in Balfour Beatty, therefore, outperform those of sector peers CRH (LSE: CRH) and Galliford Try (LSE: GFRD)?
Two-Speed Growth Prospects
When it comes to growth potential for the three companies, there is something of a two-speed classification. On the one hand, CRH and Galliford Try are set to deliver extremely strong growth both this year and next year, while Balfour Beatty’s bottom-line is expected to be stuck in a far lower gear.
Indeed, Balfour Beatty is forecast to report earnings per share (EPS) this year that are 18% down on 2013’s level, which is hugely disappointing for shareholders. Certainly, next year looks set to be much better when earnings are due to increase by 24%, but the figures do not compare favourably to those of CRH or Galliford Try. They are expected to report growth of 41% (CRH) and 24% (Galliford Try) this year, and 36% (CRH) and 19% (Galliford Try) next year.
So, while CRH’s profit could be 92% higher in two years than at present and Galliford Try’s could be 48% higher by 2016, Balfour Beatty is forecast to increase EPS by just 2% overall during the course of the next two years.
As ever, growth companies such as CRH and Galliford Try attract relatively high price to earnings (P/E) ratios. Indeed, CRH currently trades on a P/E of 22.2 and Galliford Try’s P/E is 14.2. However, when their respective EPS growth rates are taken into account, their price to earnings growth (PEG) ratios look far more attractive, with CRH having a PEG of 0.6 and Galliford Try having a PEG of 0.7.
Both of these compare favourably to Balfour Beatty, which has a P/E of 14.3 and, as mentioned, disappointing growth prospects. As such, CRH and Galliford Try appear to be much better investments than Balfour Beatty and could perform well in the long run.
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Peter owns shares in CRH and Galliford Try. The Motley Fool has no position in any of the shares mentioned.