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McAleese Ltd soars 15%: Is it time to buy?

Shares of McAleese Ltd (ASX: MCS) have enjoyed a strong rally today, climbing more than 22% to 16.5 cents at one stage, but investors need to put it all into perspective.

The stock has actually fallen more than 57% since mid-February while it is down 73% since it peaked in August last year, making it one of the worst-performing stocks on the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) in that time.

Indeed, McAleese has proven to have been a disastrous investment ever since its stock market debut in late 2013. As can be seen in the chart below, the shares took a nosedive in January 2014 after the company failed to renew a key contract for the national Shell fuel transportation.

Source: Yahoo! Finance

Source: Yahoo! Finance

The stock was also heavily impacted as a result of the financial repercussions following a fatal road accident involving a Cootes (owned by McAleese) Transport tanker. While just one of its tankers was involved in the crash, many more were grounded over safety concerns.

The latest blunder, which occurred just last month, could also have serious financial implications for the business. One of McAleese’s biggest customers, Atlas Iron Limited (ASX: AGO), was forced to suspend some of its Pilbara mines in response to the crashing iron ore price. While it has since announced that it will keep two mines operating, it will be on revised terms with its key contractors which will impact McAleese’s overall income.

McAleese recently confirmed that it was now expecting earnings of $70 million at the EBITDA (earnings before interest, tax, depreciation and amortisation) level – down from previous guidance of $85-90 million – while it is also expecting a significantly higher net debt than first estimated.

It’s a plus that McAleese will be restarting haulage services for two of Atlas Iron’s mines, but the company will be forced to take a number of financial impairments on its various business divisions. While some investors are obviously recognising this as a buying opportunity, it maintains a high level of debt and its heavy reliance on Atlas Iron makes it seem like a very risky bet, and one that ‘Foolish’ investors would be wise to give a miss.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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