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A 15% share price crash I’d avoid, just like Thomas Cook

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If there’s one thing the Thomas Cook disaster has done for me, it’s strengthen my conviction it’s a bad idea buying into companies grappling in an emergency recovery or rescue situation. I wouldn’t have considered buying Thomas Cook shares until at least after the rescue cash was in the bank, and after I’d seen the next healthy set of full-year results.

The biggest share price fall Monday morning came from SIG (LSE: SHI), whose shares plunged 26% in early trading as markets reacted to a profit warning. At the time I’m writing, the stock had recovered some of that initial slump and is trading 15% down on Friday’s close. But what’s wrong?

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Outlook

SIG, which bills itself as “a leading supplier of specialist building materials to trade customers across Europe,” expanded on the ongoing deterioration it’s been experiencing in construction activity levels in its key markets. It told us it’s “now anticipating, in both the specialist distribution and roofing merchanting businesses, significantly lower underlying profitability for the full year than its previous expectations.”

In response, SIG has announced its intention to sell off two divisions in order to bolster its balance sheet. The firm has agreed the sale of its Air Handling division to France Air Management for €222.7m, with its Building Solutions division going to Kingspan Group for £37.5m.

Debt

I have to say I’m impressed when I hear of a company taking quick action in tough times like this. But SIG has also been struggling with high debt levels for a while, and that’s enough to make me additionally wary. At the halfway stage, net debt stood at £158.2m, which is more than twice annualised underlying operating profit (based on the first half).

That debt situation should be addressed well by the two disposals, but that leaves us with a company whose shape I can’t get my head round. I’d have to wait until I see a recovery actually happening and some figures on which I can base a valuation.

Contagion

The malaise afflicting the construction industry seems to be spreading too, with Travis Perkins (LSE: TPK) dipping 8% in early trading, and Howden Joinery down 5%. 

Like SIG’s shares, Travis Perkins’ have pulled back up again and, as I write, are trading just 3% down on the day so far. But, as one of the UKs leading building materials suppliers, any further slowdown in the construction business could be a cause for caution here too.

Travis Perkins shares have been erratic in 2019 so far, but they’re up 20% over the past 12 months and offer a forecast dividend yield of around 4%. That’s not the biggest yield on the market, but the payment would be more than twice covered by predicted earnings, even with EPS expected to fall 9% this year.

More debt

Travis Perkins reported a decent first half, with adjusted operating profit up 15% and adjusted EPS up 20%. But it’s another company that carries high debt, reaching £414m at the interim stage, and debt-intensive companies can be more likely to suffer than most during tough economic times.

Should we face a post-Brexit recession, I can see the whole construction materials sector suffering. I’d sit back and watch.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. 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.

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