If you’re thinking about buying SNC-Lavalin Group Inc. on the cheap, with the shares down more than 20 per cent on Tuesday, there is a lot to consider. For sure, the news that the engineering firm has delayed its quarterly financial report and announced that its 2011 net income is likely to be 18 per below earlier projections, due to various financial charges, seem like small potatoes. After all, these look like short-term setbacks.
What we have here is panic selling of an exceptionally profitable company. And that can mean just one thing: Investors are looking beyond this quarter and focusing on the fallout from something far murkier: SNC-Lavalin has said that $35-million in payments made in the fourth quarter were, in the words of a press release, “documented to construction projects to which they did not relate.” Cue the internal investigation, which is what is delaying the quarterly results.
The company’s reputation is at stake here – and that’s a big threat for a company that must bid on big-dollar projects, often in somewhat wild locales. As my colleague Paul Waldie noted, SNC- Lavalin has been dealing with allegations relating to its work in Libya and its close ties to the family of former dictator Moammar Gadhafi. Earlier this month, it dismissed two executives connected to Gadhafi’s son.
It’s all quite ugly, but it is hard at this point to see what the longer-term financial implications are. Pierre Lacroix, an analyst at Desjardins Securities, has put his views on the stock under review. Previously, he had tapped SNC-Lavalin as his “top pick” with a bullish $64 price target on the stock. In early afternoon trading, the stock was trading below $39, which is close to a three-year low.
From a financial perspective, he notes, the $80-million in total charges in 2011 would lower consolidated earnings to $2.42 a share, down from his previous forecast of $2.92. Though Mr. Lacroix doesn’t say it explicitly in his note, the suggestion here is that the damage to SNC Lavalin goes beyond this financial perspective.
Look at this way: Tuesday's share price decline has wiped out $1.5-billion (yes, billion) from the company's market capitalization, which dwarfs the near-term financial hit.
Still, for anyone thinking about taking a flyer on this now-beaten-up stock, there are some selling features. Earnings have been rising steadily over the past decade, with the exception of a one-quarter dip in 2007, and return on equity is an impressive 28 per cent.Report Typo/Error