QinetiQs(LSE: QQ) shares are falling today after the companys CEO,Leo Quinn, defected to struggling construction groupBalfour Beatty. As QinetiQ slumps, Balfours shares have jumped on the news.
Mr Quinn was responsible for turning QinetiQs around, which is why investors are dumping the companys shares following thenews of his departure. Indeed, Mr Quinn arrived at the company during a time of falling defence spending around the world and he quickly got to work.
After joining the group during 2009, QinetiQs then-new CEO started an aggressive turnaround plan and it seems to have worked. Since September 2009 QinetiQs shares have jumped 70%. Earnings per share have risen 44% over the same period.
Nevertheless,Mr Quinn will have his work cut out at Balfour. The construction company has been struggling for around two years now, issuing its fifth profit warning within 24 months during September. This latest profit warning was accompanied by the news that management had discovered a 75mshortfall in the groups books.
What should you do?
It seems as if the market believes that now Mr Quinn has left QinetiQ, the company will struggle. Whats more, before todays slump QinetiQs shares were trading at a forward P/E of 15.4, a valuation which did not leave much room for disappointment.
QinetiQs shares have now fallen to a less demanding valuation of 13.6 times forward earnings but this is still a valuation that does not leave much room for error. The companys dividend yield of 2.1% is attractive, although better yields can be found elsewhere.
Nevertheless, Mr Quinn has left a lasting legacy at QinetiQ. The company is now slimmer and more streamlined than it was when he took over. Underperforming non-core divisions have been sold off to reducedebt and fund share buybacks, while the company is nowa trusted partner to government organisations, predominantly in the UK and the U.S.
So it looks likeQinetiQ shouldcontinue to function without its transformational leader.
Running out of cash
On the other hand, Mr Quinn has a lot of work to do before he can claim to have successfully turned Balfour around.
That said, returning to Balfour as CEO takes Mr Quinn back to his roots. He started his career as acivil engineer at Balfour and believes that the company has all of the building blocks in place to make a recovery.
But with Balfours profits collapsing, the company is now facing the prospect of adefault if it cannot complete the sale of itsAmerican division, Parsons Brinckerhoff. If the sale does not go through, then the company could be forced to ask investors for extra cash to avoid insolvency. Balfours dividend payout could also be for the chop.
It’s up to you
Of course, it remains your decision whether you buy, sell, or hold QinetiQ (or Balfour).
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.