Those waiting or hoping for a turnaround in the fortunes of Balfour Beatty (LSE: BBY) will be disappointed with todays update, no doubt.
A peek at the longer-term share-price chart reveals that shareholders will be used to such lacklustre performance, so is it time to switch investments?
Challenged by its business model
Balfour Beattys business model doesnt lend itself as great support for a successful investment for shareholders in the firm.
The company describes itself as an international infrastructure group, and reckons it finances, develops, builds and maintains complex infrastructure in areas such as transportation, power & utility, and social and commercial buildings. The projects might be big, but Balfour Beatty remains a general contractor and thats a large part of the problem. A business model based on turning over lots of bespoke and complicated contracts makes it hard for the firm to get into an operational groove.
When operational requirements keep changing for a firm, as with every new project won, its hard for contracting companies to predict challenges in advance. Costs often exceed expectations and the potential for profit on a project vanishes. We see such situations so very often. On top of that, contracting firms carry a big overhead burden generated by the work required to pitch for a job in the first place. Generally, the work done to tender for a contract goes unpaid at its most competitive extremes, going into business like that is a bit like going into a boxing match with your arms tied behind your back!
Taking its medicine
Balfour Beattys update today reveals that the firm expects legacy issues in the UK, US and Middle East to result in an additional shortfall of between 120 million to 150 million in 2015s pre-tax profit. Ouch! Yet long-suffering shareholders have heard all this kind of thing before often.
On a positive note, the company reckons its transformation programme is gaining traction.The aim is to implement new project disciplines and financial controls. A replacement senior leadership team is almost complete, and the directors have their eyes on a 100 million permanent cost-reduction programme.
Perhaps Balfour Beatty has some turnaround potential. However, given the constraints of the terrible industry it operates in, Id rather take my investing chances elsewhere. In one example, Costa Coffee owner Whitbread (LSE: WTB) has a much more attractive business model.
On a caffeine high
Last months update from Whitbread couldnt be more different from Balfour Beattys recent news. According to Whitbreads directors, the new financial year started well, with total sales growth for the first quarter of 12.5% and good like-for-like sales growth of 4.3%, driven by continued momentum in the firms Premier Inn and Costa brands.
Theres no struggling with legacy issues or plans to turn things around with Whitbread, and for good reason the companys business model is entirely different from Balfour Beattys, and much better.
In essence, Whitbread delivers a simple service, which is repetitive and easy to replicate. The firms coffee outlets, hotels and restaurants all follow the same pattern, which gives the firm opportunity to become expert in the execution of its operations. Once the business model in one location is as efficient as possible, Whitbread then duplicates that system in another location. The complexity and variation of a Balfour-Beatty-style set-up is missing, and in its place, we see under-control costs and oodles of profit.
Rather than hoping for a turnaround in fortunes at struggling Balfour Beatty, I’d much rather take my chances with an efficient and growing operator such as Whitbread. However, if you click the link that follows, you can find out more about three hidden factors that our analysts think make an alternative investment proposition a potentially lucrative play for 2015 and beyond. You can follow this up right now by clicking here.
Kevin Godbold 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.