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Why I’d shun falling knife Carillion plc for this ‘secret’ growth stock

Catching a falling knife is always dangerous, just ask any investor who snatched at Carillion (LSE: CLLN) in recent months. They were already hurting, even before Friday’s vicious scythe downwards, which saw the stricken support services company’s share price drop as much as 50% at one point.

Profit crash

The wipeout put the tin lid on a dreadful 2017 for the group, whose share price has fallen 90% in the past 12 months (and the year isn’t over yet). Management’s hard work cutting costs and raising cash has come to little with balance-sheet debt now many times its fast-shrinking market capitalisation.

On Friday management issued yet another profit warning, revealed higher than expected net debt, warned it will breach banking covenants by the end of the year, and announced a recapitalisation. It was dreadful, and the problems will not even begin to be properly tackled until next year.

The dreaded shrinks

Thankfully, I have been urging caution to knife catchers. On 26 July I warned Stand clear: Carillion plc has further to fall! The crash threw up serious underlying problems that would look even worse when exposed to the light day, and any turnaround would take a long time. “It’ll have your fingers if you let it”, I wrote. I hope it didn’t.

Carillion’s new, reduced market cap of just £111m will make recapitalisation even harder (it was £180m on Thursday). Do not be tempted by the rock bottom valuation of just 1.5 times earnings, the road to respectability will be a long one. Traders might want to play it, investors should steer clear.

Power up

Company share prices can fall for a long time, just look at FTSE 250 power generation specialist Aggreko (LSE: AGK). Its share price peaked at 2,400p in 2012 and sank as low as 850p in August 2017. The group was hit by the oil and gas industry downturn as well as the slowing economy in Latin America, but in recent months it has started a comeback.

In August I said there is light at the end of the tunnel as CEO Chris Weston reported good progress in boosting the group’s product offering and reducing its cost base, with £100m of cash savings targeted. The share price has climbed around 12% since then to 955p. In contrast to Carillion the bad news has mostly been flushed out, and the comeback appears to be under way.

Right place

Lest we get carried away, earnings per share are forecast to fall 9% in 2017, the fifth consecutive annual drop, but City analysts foresee brighter times with a 13% climb in 2018. I wish Aggreko was a bit cheaper, it currently trades at a forward valuation of 16.9 times earnings. The dividend yield of 2.9% is solid if not spectacular, but at least it is covered two times.

The market is waking up to Aggreko’s recovery potential with Jefferies claiming this week that everything is falling into place and the stock is now a buy. The broker has doubled its target price from 850p to 1,250p, which would suggest 30% upside from here. Aggreko has the power, Carillion does not.

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Harvey Jones 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.