It seems that over the past five years investors have given up on engineering firm Cape(LSE: CIU) as the company has struggled to achieve any substantial earnings growth. Indeed, since mid-2012 shares in Cape have declined by around 3% as revenue has increased steadily from £737m to £864m, but pre-tax profit has bounced between a low of -£143m to a high of £30m before falling back to -£44m for 2016.
With such a spotty record of growth, it's easy to see why investors do not seem hugely interested in Cape. With all but the diehards having given up on the company, its shares trade at a discount valuation, which may offer a great opportunity for value investors.
the shares currently trade at a forward P/E of 7.7 despite the fact that City analysts expect the group's earnings per share to grow by 5% this year.
And it now looks as if these city forecasts are set to be revised substantially higher following a trading update from Cape today. Specifically, the company announced that following several substantial contract awards, management expects earnings performance to be "materially ahead of previous expectations" for the current year. Unfortunately, despite this upbeat statement, within the trading update management went on to note that 2018 may be more of a challenging year. This is due to the "reduction in volume from the current high level of construction activity in Asia Pacific and the effect of project delays and margin pressures in the Middle East."
Still, even though management now believes 2018 will be a tough year for the group, the overall takeaway from today's trading update is a positive one. Cape announced today the award of one new contract in Australia and the renewal of two contracts in the North Sea. While the majority of the work on the new Australian contract is expected to take place in the second half, the North Sea contracts with BP provide up to three years of work for the group and the total value of the contracts is more than £150m. For Cape to be able to win such work at a time when oil companies are aggressively cutting costs shows just how appreciated its services are.
Time to buy?
After a rough few years, it looks as if it could finally be time to buy the shares. Even though the company is expecting a tough 2018, a positive 2017 should restore the market's faith in the group's growth potential. What's more, with more than half a year to go before 2018 begins, management has time to try and improve the outlook for the year.
Cape's low valuation discounts much of the growth risk associated with the company with a forward P/E of less than eight. But if management can surprise investors with a positive performance, then the combination of both higher earnings growth and a revaluation could produce lucrative rewards for long-suffering investors.
While you wait for the turnaround, shares in Cape currently yield 2.9%. The payout is covered more than four times by earnings per share.
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Rupert Hargreaves has no position in any shares mentioned. 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.