The Kier Group (LSE: KIE) share price has doubled from the lows of 60p seen at the end of July. However, the firm remains heavily indebted and is in the middle of a plan to sell its housebuilding business and scale back its property operations.
Although these are among the group’s most profitable activities, they require a lot of cash up front. By scaling back these operations, chief executive Andrew Davies hopes to free up cash to reduce the group’s net debt — something I think is urgently needed.
We may get a brief progress update on 15 November, when the company will hold its annual general meeting. But I think we can get some clues on what’s likely to happen next from the market’s view on this stock. Let me explain.
Heading for 200p?
At about 120p, Kier shares are trading on about 2.4 times 2020 forecast earnings. This tells me the market has a very strong view that one of two things may soon happen. One possibility is that the firm’s future profits will be much lower than current forecasts suggest. This would increase the stock’s price/earnings ratio to a more normal level.
The other possibility is the market is pricing in the risk that Kier will be forced to issue a lot of new shares to raise cash. This might mean swapping some of the group’s debt for new shares. Or it could mean a placing, or rights issue, to raise fresh cash from shareholders.
In either case, existing shareholders would see the value of their stake diluted unless they were prepared to buy more shares. Issuing so many new shares would, of course, have the side-effect of increasing the stock’s P/E ratio to a more normal level.
What I think is very unlikely to happen is Kier’s profits will bounce back, debt will be repaid and shares will rocket higher. In my view, Kier shares are unlikely to reach 200p in the near future. Indeed, I continue to see this as a stock to avoid, due to the highly speculative nature of this situation.
A top performer
If you’re looking for companies exposed to infrastructure and transportation, I believe National Express (LSE: NEX) could be a much better option. This transport firm is well-known in the UK for its bus and coach services. But it also has significant operations in Morocco, Spain and the USA.
Indeed, a recent contract win means that from next year, National Express will operate more buses in Morocco than in the UK. I see this geographic diversity as an attraction, as it should reduce the impact of any country-specific problems.
The firm’s strategy certainly seems to have been more successful than that of rivals. Over the last five years, the National Express share price has risen by about 89%, compared to 10% for FirstGroup and to significant falls for Go-Ahead Group and Stagecoach.
Despite this strong performance, I think National Express shares still look reasonably priced. At the time of writing, the shares trade on about 13 times forecast earnings, with a dividend yield of 3.6%.
It might be worth waiting for the next market dip to try and pick these up a little cheaper. But even at current levels, I think this stock could be a profitable long-term buy.
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Roland Head owns shares of Go-Ahead Group. 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.