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Why this S&P/ASX 200 (Index:^AXJO) (ASX:XJO) stock can finally outperform in FY19

Don’t be too hard on yourself if you can’t quite work out whether to laugh or to cry at Downer EDI Limited’s (ASX: DOW) full year results.

The market also had difficulty digesting the news with the share price of the diversified construction and engineering group initially falling when its results were released, before rallying 0.5% to $7.54 in late afternoon trade even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index lost 0.2%.

Management posted a 61% plunge in statutory net profit to $71.4 million but if you stripped out a whole bunch of one-off items totalling $178.6 million, underlying net profit actually rose 38% to $249.7 million as revenue jumped 62% to $12.6 billion.

If that didn’t throw you off, management is warning that a change in the way it books revenue and costs will have a $252 million negative impact on its retained earnings. This change in the accounting standards may prompt some analysts to change the way they calculate fair value of the stock, which would make it harder to compare Downer’s future earnings with its past performance.

But on the upside, management is tipping net profit before amortisation of acquired intangible assets (NAPTA) to hit $335 million in FY19, or around a 13% increase to last year’s underlying NPATA.

The fact that Downer upped its dividend 17% to 14 cents per share will also give investors some confidence that management is feeling upbeat about the future.

If you looked at the industries Downer operates in, it’s easy to see why the group should be upbeat. It’s well placed to benefit from increased public infrastructure spending through its roads and rail divisions, while its mining services arm is benefitting from an upswing in activity in the sector.

It’s also exposed to other growth industries such as renewable energy, and water and health, although the latter is a thorn in its side due to the troublesome Royal Adelaide Hospital contract that it inherited through its majority investment in Spotless Group Holdings Ltd (ASX: SPO).

Downer has handed in a messy result, but I think it’s well placed to outperform over the next 12 months given the fact that its valuation looks reasonably undemanding for a business that is firing on nearly all cylinders. Shares in Downer have so far only managed to keep pace with the ASX 200 index over the past year.

The group isn’t the only one that is enjoying the macro-economic tailwinds. Other contractors like Cimic Group Ltd (ASX: CIM), NRW Holdings Limited (ASX: NWH) and Worleyparsons Limited (ASX: WOR) are also finding favour with investors.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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 Scott Phillips.

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