Artful Investing

Severfield Rowen is a quality company. They are a group of similar companies, the largest is Severfield-Reeve Structures. The principle line of business is putting together large steel structures, which later get made into big new buildings, bridges etc.

Severfield Rowen has just made a lot of hay, well, steel, on Heathrow Airport's terminal 5 building. The London Olympics in 2012 will deliver the company another bonanza. Severfield Rowen is expecting work in London to peak in summer 2009.

So, what are the shares trading at and what are future earnings expected to be?

price to buy: 323.5p
2008 forecast: 40.26p
2009 forecast: 42.17p

so, a company with forecast steady earnings trading on a P/E ratio of 8.03.

Severfield-Rowen has traditionally shown much strong growth. Let's look at the 5 year pre-tax profit figure:

2003: £9.12m
2004: £12.22m
2005: £19.65m
2006: £30.29m
2007: £38.36m

The growth is expected to dry up. This perhaps helps explain why the P/E ratio is so low. The market is concerned growth has finished. Is this a cyclical stock? Will earnings start to fall, have large construction projects now finished?

Let's look at the most recent company announcement:

                                         2007          2006
Revenue                                  300.7         295.1        1.9%
Underlying* operating profit             42.7          29.1         46.6%
Underlying profit before tax             42.9          30.3         41.8%
Underlying basic earnings per share      35.74p        25.64p       39.4%
Dividend per share                       20.00p        14.25p       40.4%

Severfield Rowen enjoyed a fantastic 2007.

What do the next few years look like however, as much of the 2007 business will be Terminal 5 work. Let's look at the crucial outlook statement.

Outlook

•  Despite global financial and economic outlook, the Board remains
  optimistic of future growth with a record order book of £455m providing a
  solid platform for the next 12 to 18 months
•  2008 has commenced well and our outlook is positive
•  Diverse range of projects and geography, including Power Stations,
  Hospitals and Retail Malls

What I'd like to see from Severfield-Rowen is more business overseas and diversity of business. Big building projects are clearly what is needed - I think the market needs to see the company serving industries that won't be hit by consumer downturn. Investors won't be rushing to build shopping malls if they think the British consumer is all spent out.

In their statements management talk about prosperity and success but not growth and progress. The market is forecasting growth, but nothing like the growth that has been seen previously. Are there any signs that Severfield Rowen can do any better?

There's not much. Possibly, despite the low P/E ratio and the high dividend yield, the shares are probably fairly priced.

The Artful Dodger