Dont you dare! Really. Dont even think about it. I know youre tempted. You never could resist a falling knife, could you? Well, try to avoid snatchingat this one. Support services companyCarillion(LSE: CLLN)is just toorisky right now. Itll have your fingers.
Watch out!
I know the temptation of catching a falling knife. I have tried severaltimes, most notably with oil majorBP in 2011, too soonafterthe Deepwater Horizon blow-up in April 2010. On that occasion and every other, I drew more blood than profits.
That lower share price is hard to resist, isnt it? Earlier this month, Battersea Power Station rebuilder Carillion slumped 35% after shockingmarkets with a profit warning, dividend suspension, and chief executive resignation. Traders and investorswho lunged for the flashing blade at that point arelicking their wounds a fortnightlater, with the stock now down 70%, from 190p to just 61p.
Thanks a Carillion
Itfell another 4% on Tuesday. It may continue falling, it may not. I dontknow. What worries me is this: as we saw with BP, and so many other profit shockers, it doesnt happen by accident. The crash throws upserious underlying problems that will take years to put right.
So it is with Carillion. Today, the company has a market cap of 216m. So the845m cash flow hit on a clutch of construction contracts announced on 10 July is a big deal, equivalent to almost seven times last years net company profit. Worse,average net borrowing is expected to spiral from 587m last year to695m, or possibly 800m according to some reports. Big money for a small company.
Triple trouble
Carillionis losing hundreds of millionson three UK public-private partnership contracts, plus projectsin Qatar, Saudi Arabia and Egypt (markets it is nowquittingas too risky).One or two hits would be bad enough, combined itlooks like dereliction of duty.
If I was in charge of a major building project, I wouldnt be rushing to hire Carillion. Perhaps I am being too pessimistic here. The company has just announced a brace of long-term Ministry of Defence contract wins, pluswins on the HS2 line. Deals like these are itslifeblood, but the bidding processes were ata late stage when the bad news broke. The companywill enter future bids from a far weaker position.
Look sharp
Managementalso faces the fraughtand lengthy process of raising around 500m, a sum equivalent to double its market cap. It could struggle to win oversceptical investors and the process will take time, withthe uncertainty hanging over the share price.
Also, Carillions share price is in long-term decline. Its shares have been falling consistently for more than three years, from a height of373p in March 2014. They now trade at around one sixth of that value. Turning it round will also take yearsand there isno dividend while you wait. You will not become a Carillion-aire. You mightlose your fingers, though.
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