Downer EDI Limited drops on profit result: Is this the end of the bad news?

Downer EDI Limited (ASX:DOW) is not expensive and could be one for the watchlist.

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What: Leading engineering and maintenance firm Downer EDI Limited (ASX: DOW) has released its interim results today and the market hasn't been particularly impressed. By mid-afternoon the shares had fallen around 4% in an otherwise strong market which has seen the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rally 0.5%.

The results:

  • Revenue across the group dipped 8.8% to $3.6 billion
  • Earnings before interest and tax fell 11.5% to $141.7 million
  • Net profit after tax (NPAT) slipped 4.4% to $94.7 million
  • Return on funds employed declined from 16.6% to 15%
  • Net debt increased to $252.7 million
  • The interim fully franked dividend was increased by 1 cent per share (cps) to 12 cps

Now What: Management unsurprisingly provided a muted outlook for Downer considering the headwinds the mining services sector faces. Guidance included $18 billion of work-in-hand and a NPAT target for the full year of $210 million.

The share price of Downer has slumped by 46.5% over the last five years – a scenario that is unfortunately all too common amongst resource and mining service sector stocks. Falls like this, can at times create opportunities. Based upon management's expectations, Downer should earn approximately 44.5 cps for the full year. Including today's share price fall, this implies the stock is trading on a forecast price-to-earnings ratio of about 9.75x. That's probably not far away from fair value and could make the stock one for the watchlist for investors prepared to take a through-the-cycle view.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.  

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