Better contrarian buy: Carillion plc vs NCC Group plc

turnaround

They may operate in completely different markets but construction and support services firm Carillion (LSE: CLLN) and cyber security business NCC Group (LSE: NCC) do share one similarity. They’ve both endured huge share price falls of late.

Which, if either, should plucky investors back to turn things around? Here’s my view.

Grim numbers

After an awful end to 2016 (when the company disclosed the loss of three major contracts), there was never any expectation that today’s full-year numbers from NCC were going to be anything other than fairly dire. So proved to be the case.

Despite group revenue rising 17% to £245m over the 12 months to the end of May, the company still booked an operating loss of £53.4m in the last financial year. Contrast that with 2016’s operating profit of £11.4m.   

So why are the shares currently up 8%? It all seems to be down to a positive reaction to the conclusions reached from the company’s strategic review.

While reflecting that recent performance had fallen “well short of original expectations,” Executive Chairman Chris Stone stated that NCC still enjoyed “significant organic growth” in its core markets.

In addition to highlighting the company’s intention to improve the way it was organised, Stone was keen to draw attention to the NCC’s sound finances (net debt fell to £43.7m from the £48.8m figure reported at the end of H1) and how sentiment towards the Manchester-based business from markets and customers continued to be positive.  

The market also appeared reassured by the fact that earnings expectations for 2018 hadn’t been altered and the dividend has been maintained.

For long-term investors, I think NCC could be a decent buy, even if its stock trades at a still-rather-expensive 22 times forecast earnings. The demand for cyber security services will only grow over time and the company’s decision to focus on this (and sell its Web Performance and Software Testing businesses) appears sensible. 

Worth a punt?

Embattled Carillion’s share price also climbed higher this morning following the announcement it had managed to bag two new contracts with the government’s Defence Infrastructure Organisation (DIO).

Worth a combined total of £158m over five years, the contracts will involve the company delivering soft facilities management services to 233 military establishments in the North of England, Scotland and Northern Ireland. Positively, the contracts also allow Carillion the opportunity to further increase earnings through catering and retail sales.

With this news coming hot on the heels of yesterday’s announcement that the company has been appointed to deliver part of the HS2 rail line, should investors see recent events (and today’s 12% share price rise) as an indication that it’s time to pile in? Not in my opinion.

Putting things in perspective, the recent uplift in its share price is more likely the result of short sellers closing their positions rather than a reaction to these contract wins.

In addition to the above, at roughly three times its market capitalisation, the huge debt burden hanging over the company simply can’t be ignored.

With the dividend suspended and a rights issue looking increasingly likely, throwing cash at Carillion now appears more akin to gambling than investing and the very opposite of the philosophy espoused by the Fool.

For me, NCC looks the far better buy of the two.

There is another way…

If investing against the tide seems like more trouble than it’s worth, why not check out a special report from the Motley Fool’s analysts in which they highlight five superstocks that show little sign of ever disappointing holders.

Five stocks to retire on is available to read completely FREE of charge and without obligation.

Just click here and it’s yours.

More reading

Paul Summers has no position in any shares mentioned. The Motley Fool UK owns shares of NCC. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s