FTSE 250 stock John Wood Group (LSE: WG.) has tanked recently. This month (February), it’s down more than 60%. Meanwhile, over the last year, it’s fallen more than 80%.
Is the British engineering and consulting business worth considering as a value/turnaround play? Let’s discuss.
What’s going on?
When a stock tanks like this, it’s important to find out what’s going on. This can help determine if there’s a potential investment opportunity. Now, in this case, there are a few issues that need to be highlighted. And some of these are pretty serious.
For a start, the company advised earlier this month it now expects negative free cash flow of $150m-$200m for 2025. Previously, it was forecasting “significant” free cash flow for the year.
This lack of cash flow could be a problem for the group as it has quite a bit of debt on its balance sheet ($690m at the end of 2024). According to analysts at Kepler Cheuvreux, the company may need to raise $400m from investors to stay afloat.
Next, the company recently commissioned an independent review of its financials by Deloitte after discussions with its auditor. And this review has identified “material” weakness and failures in the group’s financial culture, governance, and controls.
It’s worth noting here that following provisional indications from the review, the company’s evaluating the extent of prior year adjustments to its financials. In other words, previous earnings may need to be restated.
Additionally, the company recently said CFO Arvind Balan had stepped down with immediate effect. He had been in the role for less than a year.
So overall, there’s quite a bit to process here. It’s easy to see why investors have dumped the stock.
Worth a look today?
When a stock falls by 80%+, there can sometimes be an opportunity for a rebound. But investors need to weigh up the possibility of a rebound against the risks (further share price weakness).
Now, taking a bullish view for a minute, the company’s planning to transform itself by moving away from lump-sum turnkey projects (where a contractor agrees to complete a project for a fixed price) and cutting costs (annualised savings of $60m this year). These moves could help to improve its fortunes.
However, in my view, the risks here are very high. The debt on the balance sheet’s a problem, especially with the lack of free cash flow. If the company’s forced to raise equity to address this, it could lead to further share price weakness for investors. Often, a major equity raise dilutes existing shareholders’ holdings significantly.
I’m also concerned about the provisional findings from the independent review. At this stage, we don’t know how prior earnings will be affected.
One other thing worth mentioning is that in 2023, private equity firm Apollo Global Management made several offers for this company. However, it then suddenly decided it wasn’t interested in a deal. Apollo didn’t say why it pulled out, but the sudden withdrawal suggests it saw something it didn’t like.
Given the risks, I don’t see much appeal here. I think there are much better stocks to consider buying today.
This post was originally published on Motley Fool
