Answering the question, ‘what strategy to follow and when to apply it’ is an age-old investor dilemma.
Should we buy a firm down on its luck, such as Balfour Beatty (LSE: BBY), in the hope that a trading recovery could send the share price rocketing?
Then again, perhaps buying a company firing on all cylinders now, such as Whitbread (LSE: WTB) could deliver more pleasing investment results.
A challenging industry
By looking at the longer-term share-price chart, we get a sense that Balfour Beatty struggles to make its living. Today’s 245p or so is a whisker below the 2009 credit-crunch nadir of around 260p. The longer trend for the share price seems to be down.
The firm is an infrastructure contractor and the industry is characterised by competitive tendering, low margins and one-off operational set-ups that vary from contract to contract without being easily duplicated or reproduced elsewhere; the complexity and costs associated with running a business like that make it hard to turn a profit.
Today’s full-year results show a loss of £59 million and the company suspended its dividend to preserve balance sheet integrity. It’s been a challenging year for Balfour Beatty with several profit warnings along the way, director departures and a takeover approach that failed.
The directors reckon part of the problem is some construction contracts went wrong, but I think contracts in construction, and contracting in general, always have potential to be unprofitable or loss making in the execution. Costs can always escalate and ‘winning’ a contract in the first place often means a firm is the lowest bidder (but not always). There’s just not enough meat in the game to make a buy and forget investment in the sector worthwhile.
That said, a shorter-term play could be interesting based on the firm’s potential to recover operationally from here. Already, the shares are up around 58% since October.
Duplicatable simplicity
At the other end of the scale from Balfour Beatty’s complex operations and wafer-thin margins sits Whitbread’s duplicatable and simple business model. Higher margins, resilient cash flow, operational efficiency and a rinse-and-repeat approach to expansion have driven the shares up around 650% since 2009.
Within the hospitality sector, Whitbread’s main growth-driving brands are Premier Inn and Costa Coffee. The firm’s recent fourth-quarter update couldn’t be more different from Balfour Beatty’s performance, with total sales growth of 14.3% and like-for-like sales growth of 5.8%. I’m looking forward to Whitbread’s full-year results due on 28 April, but it’s clear that the firm has seen another year of strong growth.
Consistent good performance rarely comes cheap and Whitbread shares always seem to look expensive on conventional valuation measures such as the P/E ratio. However, the investment outcome for anyone biting the valuation bullet and buying the shares over the last few years was good.