Wood Group (LSE:WG.) shares pushed upwards on 22 August following a positive trading update. The engineering and consultancy firm posted better-than-expected adjusted H1 earnings. This also led management to say that annual profit would be ahead of forecasts.
So, having fallen 80% over the past five years, is it time investors reconsidered Wood Group?
Valuation
The share price has collapsed in recent years. The FTSE 250 company had suffered from a couple years of diminishing growth before refocusing its efforts on the renewables sector. It then went on to sell its Environment and Infrastructure business. More recently, we can observe a price spike associated with an abandoned takeover by Apollo Global Management.
This falling share price has meant that the company’s valuation relative to its sales and earnings looks more attractive. The table below highlights some relative valuations versus the energy industry.
| Wood Group | Energy Average | |
| EV-to-sales (TTM) | 0.38 | 1.98 |
| EV-to-sales (Forward) | 0.36 | 2.22 |
| EV-to-EBITDA (Forward) | 5.1 | 5.9 |
| Price-to-book | 0.35 | 1.7 |
Wood Group’s relative valuations indicate a more attractive positioning compared to the broader energy sector. This could potentially present an opportunity for investors seeking relatively more favourable valuation metrics within the industry.
However, it’s worth highlighting that it’s not strictly fair comparing Wood Group with all energy companies. That’s the case for any comparison within the industry. For example, oil majors have a very different business model and profit margins.
Positive momentum
The favourable trading results could be a pivotal moment for the share price of the Aberdeen-based company. Looking ahead, Wood Group anticipates that the adjusted core earnings margin will remain relatively stable in the short term, hovering around 7%.
This projection is influenced by ongoing business investments. The adjusted EBITDA margin actually fell from 7.2% last year to 6.8% in the first half of 2023.
Furthermore, the firm stated that while its adjusted EBITDA for the whole of 2023 is exceeding initial expectations, it now aligns with its medium-term goal of mid-to-high single-digit growth. This strategic focus on sustained growth is significant as investors are rightfully concerned about committing to stocks lacking a well-defined growth path.
The improved financial figures also have a positive bearing on the company’s debt situation. The ratio of net debt to adjusted EBITDA currently stands at two times, marking a notable improvement from the previous year’s figure of four times.
This favourable shift in debt metrics underscores the company’s efforts to manage its financial obligations more effectively and could potentially contribute to enhanced investor confidence.
Out of the Woods?
The update undoubtedly casts a positive light on the situation. Nevertheless, it’s important to acknowledge that debt levels could become challenging should performance dip once again. Meanwhile, it’s worth highlighting that the company’s profitability has been mixed over the past five years.
With these considerations in mind, investors might be prudent to approach the situation with caution. However, the current share price is certainly enticing.
The post Down 80%, is it time to reconsider Wood Group shares? appeared first on The Motley Fool UK.
Like buying £1 for 51p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
- I’d invest £10 a day in cheap FTSE 100 shares to aim for a million-pound ISA
- What’s gone wrong with the BP share price?
- £10k invested in Rolls-Royce in the Covid crash would be worth this much now
- I’m tempted by the IAG share price but I’ll buy these 2 dirt cheap FTSE shares first
- Are these 3 FTSE 100 super-growth stocks the best shares to buy today?
James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
