Engineering contractor Downer EDI Limited (ASX: DOW) is one of the rare bright spots on the market today with its share price jumping over 2% in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is 1.1% in the red.
Almost every sector retreated with investors turning very risk averse after North Korea test fired a missile over Japan.
However, investors were more than willing buy into Downer EDI after management posted a better-than-expected full year profit and tipped higher earnings for the FY18 financial year. The company said sales improved by 6.4% to $7.29 billion for FY17 and net profit increased 0.5% to $181.5 million. Management was initially guiding for a drop in net profit to $175 million.
The good news doesn't stop there. Downer EDI said the current year's net profit is expected to increase by 5% to around $190 million, due in part to the "near full" acquisition of labour hire firm Spotless Group Holdings Ltd (ASX: SPO).
Downer EDI has closed its offer to acquire Spotless and currently owns 87.8% of the group. US hedge fund Coltrane Asset Management is refusing to sell its 10.6% stake to Downer EDI as it believes Spotless is worth more than the $1.15 per share Downer EDI is offering.
This doesn't seem to faze Downer as it believes it has effective control of Spotless. Spotless new chief executive Dana Nelson has been appointed to Downer EDI's executive committee and Downer EDI plans to appoint a chief financial officer for Spotless.
Downer EDI is undertaking a three-month review of Spotless but believes its new purchase will deliver a net profit between $85 million to $100 million in FY18.
But Downer EDI's results were not without blemish. It's mining division went backwards in FY17 and is expected to post further losses in FY18.
Fortunately, its other divisions such as transport, rail, and utilities are firing on all cylinders and the outlook for these businesses is looking bright.
This is a strong result but I think too much of the good news is in the price. I also am not crazy about the acquisition of Spotless as I have my doubts about the real synergies between the two companies.
While there is no doubt that Downer EDI should trade at a premium to its peers given its much better track record, the stock is already trading around 20 times forward price-earnings (P/E) – and that's just too much to pay for a contractor, particularly when there are other more compelling stocks to buy.
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