The Carillion plc (LON:CLLN) (CLLN.L) share price has fallen dramatically in recent months following a disappointing update from the company. It announced that its CEO had resigned, it was suspending dividends for 2017 and profits would likely be below expectations. Its share price fall of as much as 77% since the start of the year is only slightly higher than the 71% fall in the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) stock price in 2008.
After 2008, Lloyds fell further and hit a low of 23p in late 2011. Therefore, in my opinion things could get worse before they get better for Carillion, and I expect its valuation to remain volatile in the short term.
However, since 2011 the Lloyds share price has risen to its current level of 65p. That’s a rise of around 180% and this has taken place because the bank has adopted a sound strategy to my mind.
It has been able to significantly reduce costs; sometimes through painful headcount reductions. It has also improved the strength of its balance sheet and exited businesses where it felt the risk to reward ratio was unfavourable. It has also benefitted to at least some extent from the improved performance of the UK economy, which has provided it with a tailwind in my opinion in recent years.
Carillion has a good underlying business in my view, with potential cost reductions and contract wins providing some evidence of this. I feel it has the potential to recover as Lloyds has done in recent years, but there may be some way to go until it is able to do so.
The company may need to make fundamental changes to its business model in order to generate improved financial performance. This could take time, and in the meantime I anticipate more volatility and potentially even weaker investor sentiment in the near term.