Under normal conditions, SNC-Lavalin Group Inc. would be a terrific buying opportunity right now, given the stock’s long history of impressive rebounds from beaten-up lows. But these are not normal conditions.
The share price of the Montreal-based engineering company has slumped 45 per cent since June, 2018, falling to levels last seen during the depths of the bear market in early 2009.
The bad news is piling up. A failure to resolve bribery and fraud charges related to old business dealings with Libya, a $1.24-billion writedown (after tax) on its oil and gas division, worrisome debt levels, a corporate debt-rating downgrade from Standard & Poor’s and simmering intrigue regarding the company’s relationship with the Prime Minister’s Office is making the stock difficult to value.
On Friday morning, SNC-Lavalin will report its fourth-quarter financial results, which will give investors something else to think about. Analysts expect the company will report a loss of $1.72 per share, according to Bloomberg, or a loss of $1.61 per share after making one-time adjustments.
That will mark the company’s first quarterly loss since the third quarter of 2013, and reduce its complex challenges to a single figure.
“Bottom line, we recommend investors wait on the sidelines as we await more colour from fourth-quarter results,” Benoit Poirier, an analyst at Desjardins Securities, said in a note last week.
He’s not alone. Just eight of the 14 analysts covering the stock now have a “buy” recommendation after four downgrades within the past month. That marks the most bearish disposition among analysts toward SNC-Lavalin in four years, and adds to the gloom hanging over the company.
It also adds to the importance of Friday’s quarterly results, and what SNC-Lavalin’s managers say about the company’s operations.
For all the ugly headlines, a lot of bad news is already baked into the stock. The price-to-earnings ratio, using trailing 12-month profits, is just 13.2 – close to the lowest level of the past 10 years.
Admittedly, trailing profits mean little when the future looks bleak. For what it’s worth, though, management expects that per-share profits will rebound to a range between $3 and $3.20 in 2019, which implies a forward-looking P/E ratio of about 11.
What’s more, SNC-Lavalin’s engineering and construction (E&C) division, which is the backbone of the company’s operations, is now valued at almost nothing.
Here’s the math. The company owns a significant stake in the money-gushing 407 Express Toll Route, an Ontario highway stretching 108 kilometres from Burlington to Pickering. Mr. Benoit estimates that this stake is worth $28.92 per SNC share.
Include a few other revenue-generating investments and the value of the company’s capital portfolio rises to $32.20 per share, according to Mr. Benoit. That leaves the bridge, rail and power-station building E&C business valued at just $2-and-change (based on the current price of $34.31). That’s down from about $28 per share last June, when SNC’s stock was trading at about $60.
Perhaps you’re rolling your eyes at the expectation of a profit rebound this year or the true value of a narrowly held highway. But it’s interesting that the bond market appears to be onside with the optimists.
SNC-Lavalin’s five-year corporate bond, which debuted last year with a coupon of 3.235 per cent, has declined in price only slightly. On Wednesday afternoon, the bonds traded just 3.1 per cent below the issue price, reflecting cool heads among the company’s debt-holders, even after S&P downgraded SNC-Lavalin’s credit rating to one notch above junk status.
Clearly, sophisticated fixed-income investors are confident that their dollars are safe. What remains to be seen is whether investors are now positioning for a rally in the stock price.
The stock has been on a volatile path plenty of times before, usually rewarding anyone who bought low. Indeed, over the past decade, the stock has embarked on four long-term rallies that have sent the share price surging between 48 per cent and 100 per cent.
After SNC-Lavalin reports its fourth quarter results on Friday, we may get a sense of whether the stock is nearing another upswing – or weighed down by more grim news.
David Berman