It hasn’t been a great year for SNC Lavalin (TSX:SNC). Once one of the world’s premier and most respected engineering firms, SNC has been in a dog fight to stay relevant. It might sound a little like fearmongering, but the reality is that SNC has taken some major hits over the past year.
Mired in a bribery scandal, the company’s downturn began in earnest last fall. This is when it came to light that the prime minister’s office interfered in the investigation. It is also when it became clear that SNC Lavalin was not going to avoid prosecution.
SNC was lobbying the Liberals to negotiate a deal under a newly passed remediation agreement regime. This would allow SNC to avoid criminal prosecution. That didn’t quite work out the way it intended. Since then, the company has been in a downward spiral.
At this time last year, the company was trading in the low 50s. Its value has since been more than halved. The company’s share price began to stabilize in June and early July before continuing its most recent downtrend. In August, SNC Lavalin’s stock dropped by another 21%. Ouch.
It seems that whenever SNC Lavalin seems ready to turn a corner, it is thrust back into the spotlight. Unfortunately, this hasn’t been a good thing. In August, there were two key events that drove its stock to yearly lows.
Ethics Commissioner’s report
In mid-August, the federal Ethic’s Commissioner released a report that once again shed a spotlight on the company’s reputation. The commissioner concluded that the prime minister’s office had, in fact, “improperly pressured the attorney general to overrule federal prosecutors to grant the construction giant a sweetheart deal on corruption charges.”
The conclusions are damning as SNC’s criminal prosecution is once again taking centre stage. The company has little to no chance of avoiding criminal prosecution, and it stands to be one of the most scrutinized trials in corporate Canada — of all time. The ramifications can prove to be monumental, and every time something new comes to light, the company loses any sympathy vote from the public and regulators. The company is corporate enemy number one.
A conviction could lead to a 10-year ban on federal contracts, which currently account for approximately 15% of revenue. The company has already admitted that it has lost out on billions in contracts on reputation alone. Competitors are effectively using the scandal against SNC.
Credit downgrade
Following the report, SNC Lavalin was hit by another untimely event — the downgrade of the company’s credit rating. Standard & Poor’s downgraded SNC’s credit rating from BBB- to BB+. In other words, it was downgraded to junk status.
Unfortunately, this poses yet another challenge to overcome. A poor credit rating leads to higher borrowing costs. When bidding against better-rated competitors, SNC will find itself in a tough spot. It will either need to raise its bids or accept lower margins to keep up with the competition.
Foolish takeaway
Ever hear of the phrase, “don’t catch a falling knife”? SNC Lavalin is the perfect example of a stock you’ll want to avoid. In light of its issues, the company has exited many regions and business lines and has revised guidance downwards in three straight quarters. It is no longer the engineering and construction giant it once was.
SNC Lavalin is a shadow of its former self, and it will be a long a difficult path to respectability. The hit to a company’s reputation is one of the most difficult to overcome, especially in the engineering space.
Investors must also not forget, SNC Lavalin still has the overhang of a criminal trial to look forward to. The SNC Lavalin saga is far from over, and there are better risk/reward opportunities for investors. For now, it’s best to sit on the sidelines.
