Is the Petrofac share price a FTSE 250 bargain or a value trap?

The Motley Fool
Dice engraved with the words buy and sell
Dice engraved with the words buy and sell

The performance of the Petrofac(LSE: PFC) share price in the last three months has been stunning. It has gained 37%, which is significantly higher than the FTSE 250's rise of 7% during the same period.

The company appears to be performing relatively well, according to its recent update. New contract wins continue apace, and its financial performance has been in line with expectations. However, with an uncertain future, could it offer investment appeal alongside another lowly-valued FTSE 250 stock?

Solid performance

The company's performance in the 2017 financial year was relatively robust. It was able to generate net profit growth of 7% as it sought to develop its strategy. It experienced high levels of activity, while good project execution allowed it to deliver on its strategic objectives.

The company has also been focusing on its core operations. It has restructured its asset base, with the recent sale of the JSD6000 installation vessel confirming its exit from the deep-water market. Alongside this, it has experienced a high level of tendering activity, and has been awarded over $1.7bn in new orders in the current year to date. As such, it seems to be performing in line with expectations at the present time.

Uncertain outlook

However, Petrofac is expected to report a fall in earnings of 18% in the current year, followed by an additional decline of 10% next year. This has the potential to hurt investor sentiment in the stock - especially at a time when the prospects for the energy sector are improving. And with regulatory risk being a continued concern, its share price performance may prove to be volatile.

Despite this, the stock trades on a forward price-to-earnings (P/E) ratio of around 12. This suggests that it may offer a wide margin of safety, while a dividend yield of 4.3% that is covered twice by profit indicates that its total return potential remains high. As a result, it could offer long-term investment potential, and there is scope for a further recovery following its strong recent share price performance.

Turnaround potential

Also offering the potential for a turnaround is fellow FTSE 250-listed company Babcock(LSE: BAB). The engineering support services company reported full-year results on Wednesday and they showed a rise in profit before tax of 8%. The company's underlying revenue and profitability reached record levels at the same time as the business reduced net debt. It also ended the financial year with an order book and bid pipeline worth £31bn. This looks set to support future growth.

The changes made to the structure of the business over the last few years seem to be having a positive impact on its operational and financial performance. It remains on track to generate 30% of its underlying revenue from international markets by 2022. This will help to diversify its operations and may reduce risk.

With Babcock trading on a P/E ratio of 10, it appears to offer a wide margin of safety. With a growing top and bottom line forecast for the next two financial years, it could generate improving share price performance following its 18% decline over the last year.

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Peter Stephens owns shares of Babcock International Group and Petrofac. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.