When you Google the Kier (LSE:KIE) share price, the most popular related searches should give you some pause for thought.
“Why is Kier share price falling?”, “Is Kier going bust?”, “Should I sell my Kier shares?”
If Kier can rebuild its share price, it would be the turnaround of the decade. That inevitably attracts bargain-hunters.
The shares traded up to 37% higher on the release of 2019 second-half results, but the following day, they sank by 15%.
Turnaround bright eyes
The Kier share price is at historic 20-year lows. Shareholders stand to make dramatic long-term gains if the construction giant can complete its joint venture work on grand UK rail infrastructure projects like Crossrail and High Speed 2 (HS2).
As I’ve written elsewhere, big government contracts make for stable and lucrative long-term revenue. Kier is a key supplier to the UK government. The dramatic 2018 collapse of Carillion was a huge embarrassment and it is perhaps unlikely it would let the same happen to Kier.
February saw Boris Johnson’s cabinet throw its weight behind HS2. Kier has two HS2 civil engineering contracts worth £1.4bn, in a joint venture with France’s Eiffage. Carillion was Kier’s partner in the projects before it went bust.
City analysts said Kier would get only a small short-term boost if the cross-country rail upgrade got the green light. But the addition of billion pound-revenue streams over the next five years will be a huge benefit to the London construction group.
So what is the company’s current financial position? Half-year results out on 5 March saw improved operating profits but higher net debt. A wide-ranging cost-saving plan includes cutting 420 jobs, and CEO Andrew Davies said would lop £65m off its bills by 30 June 2021.
The sale of its ill-fated entry into the homebuying market, Kier Living, is progressing, Davies said. However bosses wrote down the value of the business by nearly £60m over the half-year.
However encouraging the results, Kier still made a £41m loss. Revenue also dipped 9% from £1.98bn over last year’s first half, compared to £1.82bn this time around.
Brokers Peel Hunt and Liberum Capital are still rating Kier a buy, but I think that’s a mistake. Investing in Kier is still a very high-risk strategy, in my view.
He who does not learn from history is doomed to repeat it.
A desperately low P/E ratio of 2.2 times earnings for the Kier share price doesn’t say ‘bargain’ to me. It says beware! Ratios this low indicate the company does not have the confidence of the market.
Warren Buffett’s advice on turnaround stocks may be 40 years old, but it is still as true as the day it appeared. “Both our operating and investment experience cause us to conclude that ‘turnarounds’ seldom turn,” the billionaire investor wrote in a 1979 letter to Berkshire Hathaway shareholders.
“The same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”
With the FTSE 100 crumbling on coronavirus fears, there are plenty of good businesses at fair prices for investors to consider. I don’t think Kier is one of them.
Tom Rodgers has no position in 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.