One turnaround stock I'd buy, and one I'd avoid right now

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Construction site

Engineering company Costain Group (LSE: COST) has enjoyed a good year, with its share price up 26% in the past 12 months. Over five years, it is up more than 100%. Recent months have been bumpier but the feelgood factor is back today, with the share price jumping following a positive set of half-year results to 30 June 2017.

Counting the Costain

Costain, which deploys technology-based solutions across the UK's energy, water and transportation infrastructures, has reported a strong performance, leaving the group on course to deliver full-year results in line with the board's expectations.

Group revenues, including share of joint ventures and associates, increased more than 10% from £791.4m to £874.5m, with underlying operating profit up 34% to £21.2m. Costain now sits on a comfortable net cash balance of £87.5m, up from £69.2m in 2016.

Welcome repeat

Its order book also looks healthy at £3.7bn, of which more than 90% is repeat business. This has dipped slightly from £3.9bn one year earlier, but tendering levels remain high. It reports that more than £1.5bn of revenue has been secured for the full year, up from £1.4bn this time last year.

Chief executive Andrew Wyllie said Costain is transforming rapidly to differentiate itself as the UK's leading smart infrastructure solutions company. "We are delivering technology-based solutions demanded by our clients who are spending billions of pounds, underpinned by legislation and regulation, to meet ever more complex challenges to enhance the nation's infrastructure."

Dividend hike

Investors can reap the rewards in terms of a 10% increase in the interim dividend to 4.75p per share and the stock is now on a forecast yield of 3.2%, nicely covered 2.3 times, which leaves plenty of scope for future progression. Valued at a forecast 13.4 times earnings, you are not paying over the odds for Costain's strong income and growth prospects either. Analysts forecast steady rather than spectacular earnings per share (EPS) growth of 7% in both 2017 and 2018, but after today's results the investment case looks strong to me.

Meaty Beatty

Construction group Balfour Beatty(LSE: BBY) has endured a troubled few years, with the share price trading slightly lower than it did five years ago. However, last week's half-yearly results were also well received, with the share price up 5% in early trading after a 69% rise in underlying pre-tax profits to £22m. Its order book dipped slightly to £11.4bn, although management suggested this was primarily due to chasing quality rather than quantity.

Balfour Beatty was able to hike its interim dividend by a whopping 33% to 1.2p per share, helped by an improving net cash position. However, that still leaves the stock on a forecast yield of just 1.4%, albeit generously covered 2.9 times.

Earnings growth

EPS growth prospects look strong, with a forecast 66% this year and 61% next, as the turnaround gathers pace. However, its current valuation of 39.99 times earnings suggests much of this growth is priced in, even if it is forecast to drop to 22.2 times. Balfour Beatty is on the right track and also a tempting buy, but Costain Group wins the day for me.

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Harvey has no position in any of the 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