Don’t you dare! Really. Don’t even think about it. I know you’re tempted. You never could resist a falling knife, could you? Well, try to avoid snatching at this one. Support services company Carillion (LSE: CLLN) is just too risky right now. It’ll have your fingers.
I know the temptation of catching a falling knife. I have tried several times, most notably with oil major BP in 2011, too soon after the Deepwater Horizon blow-up in April 2010. On that occasion and every other, I drew more blood than profits.
That lower share price is hard to resist, isn’t it? Earlier this month, Battersea Power Station rebuilder Carillion slumped 35% after shocking markets with a profit warning, dividend suspension, and chief executive resignation. Traders and investors who lunged for the flashing blade at that point are licking their wounds a fortnight later, with the stock now down 70%, from 190p to just 61p.
Thanks a Carillion
It fell another 4% on Tuesday. It may continue falling, it may not. I don’t know. What worries me is this: as we saw with BP, and so many other profit shockers, it doesn’t happen by accident. The crash throws up serious underlying problems that will take years to put right.
So it is with Carillion. Today, the company has a market cap of £216m. So the £845m cash flow hit on a clutch of construction contracts announced on 10 July is a big deal, equivalent to almost seven times last year’s net company profit. Worse, average net borrowing is expected to spiral from £587m last year to £695m, or possibly £800m according to some reports. Big money for a small company.
Carillion is losing hundreds of millions on three UK public-private partnership contracts, plus projects in Qatar, Saudi Arabia and Egypt (markets it is now quitting as too risky). One or two hits would be bad enough, combined it looks like dereliction of duty.
If I was in charge of a major building project, I wouldn’t be rushing to hire Carillion. Perhaps I am being too pessimistic here. The company has just announced a brace of long-term Ministry of Defence contract wins, plus wins on the HS2 line. Deals like these are its lifeblood, but the bidding processes were at a late stage when the bad news broke. The company will enter future bids from a far weaker position.
Management also faces the fraught and lengthy process of raising around £500m, a sum equivalent to double its market cap. It could struggle to win over sceptical investors and the process will take time, with the uncertainty hanging over the share price.
Also, Carillion’s share price is in long-term decline. Its shares have been falling consistently for more than three years, from a height of 373p in March 2014. They now trade at around one sixth of that value. Turning it round will also take years and there is no dividend while you wait. You will not become a Carillion-aire. You might lose your fingers, though.
Catching a falling knife too early is just one mistake investors make, and there are plenty more you should avoid.
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Harvey Jones has no position in any 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.