A constant theme of this column is that investors should learn from their mistakes and move on. You are never going to get it right all the time but if you see where you got it wrong instead of looking round for other people to blame then you will inevitably make money from investing.
I have learnt a lot of lessons along the way but from time to time I really should listen to the warning voices in my head and do what I tell other investors to do. One such misfortune befell me in April and it came home to roost this week.
My sin was to top up my holding in infrastructure and construction group Balfour Beatty (BBY) after the share price fell. To my shame, I was toying with the idea of a further investment this week when a second profits warning brought me to my senses.
It is easy to be wise with the benefit of hindsight but I was blinded by two factors: a popular weakness in failing to accept that I might be wrong in clinging to an investment; and the increasing difficulty in finding underpriced solid companies as an alternative.
I allowed myself to be consoled by the fact that Balfour is an international business and is thus not entirely dependent on the state of the UK or eurozone economies.
What I should have noticed was the speed with which Balfour Beatty’s first profit warning, issued in the third quarter report at the beginning of November, came out of the blue. Everything was going fine in the first half, with new contract wins and only the hint of markets becoming more difficult mentioned in the report in August.
By November, however, Balfour was grudgingly admitting that profits would be ‘slightly lower’ than previously expected. The real warning, though, was in the way that the news was presented, with the sectors performing in line with expectations—professional services, support services and infrastructure investments businesses—taking precedence in the announcement over construction services, where ‘difficult trading conditions have persisted’.
Significantly, and I chose to overlook this, the problems were arising in the UK, the US and Europe, so this was not an isolated problem.
As a result, after a small (and well buried) decrease in the first half in the construction services order book, Balfour saw ‘a more significant decline’ in the third quarter.
As recently as March, when full year results for 2012 were released, Balfour was claiming that it had ‘demonstrated resilience in underlying earnings and a stable order book in the face of continuing challenging conditions in the construction markets in the UK and USA’. It claimed that its ‘growth strategy of focusing on key market sectors and geographies’ was ‘making headway’.
This week, however, Balfour revealed that its UK construction business is expected to deliver significantly lower profits than management expected just over a month earlier. About £50 million lower, to be precise.
It is clear that Balfour management has been slow to get to grips with a growing problem despite knowing for the past nine months that the construction market was getting tougher.
Chief executive Andrew McNaughton has taken personal charge of the UK construction business, and not a moment too soon. One has to hope that he is not too distracted from the rest of the group, which is performing well on balance but which is also showing some problems, most notably in the German rail business where profits are likely to be £10 million adrift.
After some agonising I have decided not to cash in my existing holding at a loss. This may be a case of still refusing to heed my own advice but the balance sheet is strong, the business is still profitable and there is a dividend.
However, I am conscious that warnings tend to go in threes, or even more, and there is scope for McNaughton to throw in the kitchen sink when he examines the UK construction business more carefully, so I will certainly not be increasing my investment until there is genuine evidence of a recovery in the worst affected markets.
I am hoping that McNaughton wanted to get the bad news out of the way before the quarterly trading update on 14 May and that there will not be even worse to come so soon. If we shareholders are very lucky, that could mark the start of a bounceback, though I am not counting on it.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
