Will Balfour Beatty’s share price continue to recover after half-year earnings?

The Balfour Beatty [BBY.L] share price has been on an upward trajectory since mid-May as the stock creates further distance from March’s 52-week low.

Investors and analysts alike will be closely watching the company’s half-year earnings update on Wednesday 17 August. But should they be concerned about the construction industry’s downturn, as recent data shows the sector has declined for the first time in 18 months? Construction services forms one of the company’s three core segments, alongside support services and infrastructure investments.

On a more positive slant for the FTSE 250 constituent, the company revealed on 3 August that it has secured a lucrative highways maintenance contract with Buckinghamshire County Council, following on swiftly from agreeing deals worth $235m for a series of projects in California.

Balfour Beatty shares are 11.9% higher so far in 2022, but remain 9.9% down year-over-year. The shares are, however, up 37.8% from the 207.80p low recorded on 7 March, closing Friday 12 August at 286.4p. Balfour stock remains 11.1% below its 52-week high at 322.2p back on 16 August last year.

What should investors look for in the upcoming earnings update?

Balfour Beatty’s board said in its 12 May trading update that it continues to have confidence in the group’s ability to “deliver managed growth in profits in 2022, building on the £181m delivered by the earnings-based businesses (construction services and support services) in 2021”. The group’s investment arm also has a number of asset disposals planned this year. Investors will be keen for an update on these areas to gauge whether the group’s targets remain on track.

In May’s update, the company said overall trading had been in line with expectations, and that the group’s high-quality order book, totalling £15.6bn (versus £16.1bn in December 2021) as at the end of March, was being maintained. The figure includes the $698m Fort Meade design and construct contract from the US Army Corps of Engineers in Maryland, announced on 3 May.

Investors should also look out for an update on the company’s average monthly closing net cash balance, which increased to circa £800m in the first four months of 2022, up from the previous year’s average of £671m. The company indicated that it expects this figure to drop “moderately” once its share buyback programme is completed.

Could construction downturn hamper Balfour Beatty stock?

Balfour Beatty could see a slowdown in construction in the months ahead, after recent figures showed UK construction activity fell into contraction territory for the first time in over two years. The purchasing managers’ index (PMI) reading came in at 48.9 for July, down from 52.6 in June. This was the fourth consecutive monthly decline in activity and the biggest fall since May 2020 as “civil engineering joined housebuilding in contraction territory”, said S&P Global Market Intelligence’s Tim Moore.

The negative reading confounded analysts, who had estimated a marginal decline to 52 for July. In addition to the rising cost of living and higher interest rates, Moore said “increasing recession risks for the UK economy are taking a toll on construction activity”.

The negative trend in construction activity was reinforced by the Bank of England, after its recent downgrading of domestic GDP forecasts for 2022, 2023 and 2024. The UK central bank is “laying out the expectation that we will see a long and painful recession throughout 2023”, according to CMC Markets chief market analyst Michael Hewson.

There is a ray of light amid the gloom though, according to Hewson, who says “we will see an emergency Budget to address the challenges”. Balfour Beatty investors will be hoping the Budget has a positive effect, resisting the Bank’s worst forecasts and preventing further declines in construction activity.

Highways contract boosts order book

On a more positive footing, Balfour Beatty Living Places was recently awarded an eight-year highways maintenance contract by Buckinghamshire Council worth £176m. The partnership’s goal is to “provide a safe and resilient local road network”, by maintaining more than 5,000km of highways, carriageways, footpaths and cycle routes. Balfour Beatty shares rose 0.93% following the announcement on 3 August.

Managing director of Balfour Beatty Living Places, Steve Helliwell, said the deal “builds on our longstanding expertise and commitment to providing best-in-class highways maintenance services, while offering customer-focused solutions in a collaborative partnership”. The contract begins on 1 April 2023 and includes the option for it to be renewed for another four years.

What are analysts forecasting next for Balfour Beatty stock?

The six analysts offering 12-month price targets for Balfour Beatty shares have a median target of 367.5p, representing a potential upside of 28.3% from last Friday’s 286.4p close, according to the Financial Times. Four analysts rate Balfour Beatty a ‘buy’, along with one ‘outperform’ and one ‘underperform’ rating.