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.
Peter owns shares in CRH and Galliford Try. The Motley Fool has no position in any of the shares mentioned.