The Lamprell (LSE: LAM) share price has plunged this year as investor sentiment towards the engineering group has collapsed.
Following these declines, the stock looks cheap, and it may appeal to value-seeking investors. However, there are some things investors should be aware of before buying into this recovery story.
Lamprell share price
Since 2014, Lamprell has been in recovery mode. The oil price crash in 2014, left the company nursing heavy losses. From an income of more than $110m in 2014, it has reported four consecutive years of losses since 2016.
The stream of red ink has hurt the Lamprell share price badly. Unfortunately, the coronavirus crisis has piled further pressure on the business.
Oil and gas companies around the world have slashed capital spending in the crisis, and spending may never recover as the world moves away from oil and gas. This could prove to be a long-term drag on the Lamprell share price.
That said, Lamprell does seem to have avoided the worst of the crisis. Its latest trading update declared that the company expects to reach break-even on an earnings before interest tax depreciation and amortisation (EBITDA) basis in the first six months of 2020. That’s despite the twin headwinds of coronavirus and low oil prices.
Lamprell’s decision to expand into the renewable energy industry has helped support the company’s growth in these challenging times. Its order backlog was $580m at the end of June, up from $470m at the end of 2019.
As well as its firm order backlog, the company has a robust balance sheet. Its net cash balance was $71m (£57m) at the end of June, up from $43m (£34m) at the end of 2019.
This mammoth cash pile should give the company lots of flexibility. Indeed, at the time of writing its market capitalisation is just £77m. This suggests that the Lamprell share price may offer a wide margin of safety at current levels because the market is placing little to no value on the operating business.
Clearly, the Lamprell share price may face further challenges in the months ahead. A second wave of coronavirus may lead to more operational disruption. An economic downturn could also reduce demand for the company’s services.
Nevertheless, the group’s firm order backlog, coupled with its robust balance sheet, should help it weather the storm. The stock also looks quite cheap at current levels. It is trading at a price to book value of just 0.5, implying that the stock may be worth more than double its current market value.
As such, value investors might be interested in buying this stock as part of a well-diversified portfolio today. The Lamprell share price looks cheap at current levels and may be able to generate high total returns for shareholders in the years ahead if its recovery takes hold.
However, it is worth noting that the business has been in turnaround mode for some time. That’s why it may be better to hold the share as part of a diversified portfolio. Doing so would allow investors to profit from any upside but limit downside risk at the same time.
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Rupert Hargreaves 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.