SNC-Lavalin Group (TSX:SNC) got a boost in price earlier this week when the company announced that its CEO Neil Bruce would be retiring. One shareholder believes the stock has the potential to rise even further, up to $50, if the company makes a series of significant changes to its business. David Taylor, president and chief investment officer of Taylor Asset Management, spoke with BNN Bloomberg and stated that he wants to see the company overhaul its business and believes the departure of Bruce will be good for investors.
Among the changes that Taylor believes the company should make is to sell significant parts of its business, including the resource and infrastructure segments. He believes that making these and other decisions will help focus the company on its nuclear operations and consulting and that will be a path for the “stupid-cheap stock” to climb back up to $50.
A year ago, SNC was trading at over $60 a share and went on to lose more than half its value. With the company facing some pretty big legal issues, there have been no shortage of problems that have plagued the company.
Will changes to the business send the stock back up in value?
I don’t see the changes that Taylor is suggesting as being a solution to what’s ailing SNC. The stock hasn’t fallen off a cliff because its business is not working; prior to 2018, SNC was a profitable company that over the previous four years had strong sales numbers above $8 billion per year.
The reason for the stock’s decline isn’t that SNC has overnight forgotten how to be a profitable entity, it’s that ethical scandals have eroded the trust investors have in the company.
That’s not something that’s going to be fixed by simply changing the business and getting rid of the parts that you don’t like about it. And transforming a business is not an overnight process either, investors just need to look at the painstaking process that BlackBerry has been involved in to see that it would take years to accomplish.
If SNC is able to get through the legal process without taking a big hit to its financials and it’s given a chance to recover, then the stock could certainly get back to $50. However, I don’t expect that to happen anytime soon. SNC investors could be waiting a long time for a recovery that might not ever happen and in the meantime will lose out on more promising and safer opportunities elsewhere.
Bottom line
A new CEO and a change in the business won’t fix the problems investors have with SNC today. Thus, not only do I not believe the stock will hit $50 anytime soon, but I wouldn’t be surprised if it were to continue to fall further, potentially below $20. Until the legal issues are sorted out, the stock is more suitable for speculators than investors. Given the many other – and better – options out there, SNC is simply not worth the risk.
