The CEO may have given up trying to make this business work and left to join a private equity firm. The only thing propping up the share price is the buyback. The company makes less than 3 cents profit on every dollar of revenue it brings in. Who is it?
If you guessed Transfield Services (ASX: TSE) you’d be right. CEO Peter Goode, who’s been in charge of Transfield for 3 and a half years, has resigned, and accepted a partnership with a private equity firm, possibly conceding that the company is just too difficult to turn around. As Warren Buffett has said “When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
The company reported a full year profit of $85 million today, on revenues of over $3.1 billion. That’s a profit margin of just 2.7%. The good news is that it’s about the same as the company’s long term average. The bad news is that with a profit margin that thin, everything must go to plan. Any small mistakes and the company can swing from a profit to a loss in the blink of an eye.
Fellow professional services companies United Group Limited (ASX: UGL), Downer EDI Limited (ASX: DOW) and Programmed Maintenance Services (ASX: PRG) are pretty much in the same boat – all have fairly low margins.
Perhaps the only bright side is that the company has expanded into the oil and gas sector, which is set to grow over the next few years as a number of liquefied natural gas and infrastructure projects come online. Transfield certainly has plenty of work in hand with an order book of over $11 billion.
The outlook for the year ahead for Transfield isn’t great, with the company forecasting fairly low growth, compared to this year. Investors didn’t appear to like that much, with shares in the company down 6.3% to $1.92 at 1.30pm today. For Foolish investors, there are much better opportunities out there, despite the price fall.
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Motley Fool writer/analyst Mike King doesn’t own shares in Transfield. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.