Shares in shipping and offshore services group James Fisher & Sons (LSE: FSJ) fell by almost 35% on Monday after the company warned that profits are likely to be lower than expected this year. It’s the latest in a string of downbeat updates that have seen James Fisher’s share price fall by 60% over the last year.
I have to admit I’m a bit surprised by how bad things have become. This business has been a reliable performer for many years. Since last year’s falls, I’ve been thinking about buying. However, yesterday’s update has made me more cautious. Are these temporary problems, or has this business come off the rails?
Bad luck or bad management?
Yesterday’s profit warning will have been painful reading for shareholders. Problems revealed by the company included delays to projects in the marine contracting, decommissioning, and nuclear businesses. Ship-to-ship transfers and tankship operations are also not performing as well as hoped.
To make matters worse, the company has reached a standstill over £2m due on a long-term project and faces a £2m increase in bad debt risk from another client.
Underlying operating profit for the full year is now expected to be between £27m and £32m, compared to previous broker forecasts of £35m. That’s a big downgrade, in my opinion.
James Fisher says some of these problems are related to disruption caused by the pandemic. Some of them probably are. But in my experience, companies that suddenly reveal a string of unrelated problems are sometimes suffering from bad management.
This market-leading business needs to change
James Fisher is not some fly-by-night business promising profits in the future. The group is a well-established technical services provider that can trace its origins back to 1847. It has been listed on the stock exchange since 1952.
Many of the group’s businesses have market-leading positions in niche sectors, such as ship-to-ship transfers of oil and gas. The company is also well-established in other areas, such as nuclear decommissioning and commercial diving.
However, I’ve been reading through a presentation the group gave to City analysts in June. In among all the management jargon, my impression is that some parts of the business may have become inefficient and less competitive.
Growth may also be a concern. In 2020, James Fisher still generated half its revenue from oil and gas production and transport. Management hopes to replace some of this revenue with new work in renewables and oil and gas decommissioning. But that will require new investment and significant changes to some of the group’s businesses. Making a success of this may not be easy.
James Fisher shares: should I buy?
I haven’t bought any James Fisher shares yet. I want to do some more research into this quite complex business. But my view so far is that the company’s market-leading specialist services are likely to remain valuable and drive future growth.
Right now, I think there’s a good chance the company could deliver another round of bad news before things start to improve. I’m a little concerned about the company’s debt levels, too. For these reasons, I’ll probably wait for the next trading update in January before I decide whether to buy. But I’m definitely interested — and watching closely.