Why SNC-Lavalin (TSX:SNC) Stock Fell 21% in July

Although the latest news that SNC-Lavalin (TSX:SNC) has won court approval to sell a 10.01% stake in Ontario’s 407 toll road sent its stock higher by more than 6% August 7, the reality is that 2019 has been an abysmal year for the Quebec-based infrastructure and construction company. 

In July, SNC’s stock lost 21% of its value, in large part because its major investor, Caisse de dépôt et placement du Québec, booked a $700-million loss from its investment in SNC over the first six months of the pension fund’s fiscal year. 

The Caisse is unhappy

The CEO of the Caisse, Michael Sabia, believes that SNC must act swiftly to stem the losses at the company. In late July, SNC issued a third profit warning for 2019, withdrew its financial forecasts for the year, and indicated that its oil and gas segment would take a $1.9 billion charge in the latest quarter.

While interim CEO Ian Edwards has taken steps to focus SNC on more profitable business — it is getting out of lump-sum, turnkey contracting, opting to focus on fee-for-service work, which is much more predictable. 

“I think investors at the end of the day [are starting] to lose confidence in these businesses — in their ability to generate profit, to do things in a legitimate fashion,” Middlefield Capital president and chief investment officer Dean Orrico told BNN Bloomberg July 23. “Now [SNC is] pivoting … to a more simple, conservative lower-return, lower-risk business that’s going to garner a lower multiple and maybe more stability.”

Downsizing ahead

The company has approximately $3.4 billion of fixed-price work left to complete before entirely exiting this type of revenue generation. Investors are worried that it won’t generate enough cash flow in the coming quarters to remain a viable business. It’s feared that a significant downsizing of the company is the only way out of the mess it’s made for itself.

If you own SNC stock, the bottom may yet be tested.