Is Balfour Beatty share price a recession-proof investment?

Balfour Beatty’s share price has continued to build on the upward momentum seen in the second half of last year. A foundation of strong results and an ability to win new contracts have helped, and both Jefferies and Liberum are backing the stock as a recession play. But after the sustained rally in Balfour Beatty’s shares, is there any upside left?

Balfour Beatty’s [BBY.L] share price has built an 8.2% gain this year, outpacing the wider FTSE 100’s 4.9% rise. Over the past 12 months the stock is up over 45%, and has sustained an upward trend started in the second half of last year. On Friday 3 February, Balfour Beatty’s share price closed at 365.2p, a 0.61% gain on the day.

Helping Balfour Beatty’s shares was a strong trading update at the end of December. This showed orders were up year-on-year and followed well-received interim 2022 results.

Balfour Beatty wins new contracts

Builders like Balfour Beatty depend on winning contracts for new work. In January, the company was awarded a £1.2bn contract to deliver the ‘Roads North of the Thames’ package of works for the proposed Lower Thames Crossing. Balfour Beatty will be responsible for the design and delivery of 10 miles of new highway connecting the M25 and the Lower Thames Crossing tunnel at Tilbury, Essex.

Earlier in January, Balfour Beatty was awarded a contract worth some £90m by Fife College to build a new learning campus in Dunfermline, Scotland. Further afield, it has scored a contract to build Miami Beach’s New Grand Hyatt Convention Center Hotel. South Florida is an important market for the builder: it has more than $350m worth of projects under construction there, and over 200 Florida-based employees.

This builds on Balfour Betty being appointed as the sole contractor to both of the SCAPE Civil Engineering frameworks in 2022. The frameworks are worth up to £3.25bn and £750m, respectively, covering a period of four years, with an option for a two-year extension. In the US, notable 2022 orders include a $700m federal building in Maryland.

Trading update shows rise in orders

In an update published 8 December, Balfour Beatty said it expected its 2022 year-end order book to be 5% ahead of 2021’s £16.1bn, largely due to favourable foreign exchange movements. The builder lifted cash-flow guidance to £800m from £740-780m. Revenue was expected to be 5% ahead of 2021’s £8.3bn, and underlying profit to be in line with guidance announced during half-year results.

“We continue to expect a strong full-year operational and financial performance. Looking to 2023 and beyond, our improved, de-risked and diversified order book gives us confidence that we will continue to make progress in delivering profitable managed growth,” Leo Quinn, Balfour Beatty Group CEO, said.

This follows a strong performance in the first half of 2022, when underlying profit from operations was up 42% year-on-year to £85m. The order book was up 10% to £7.7bn, while underlying basic EPS was up a thumping 68% at 12.9p.

Liberum and Jefferies optimistic on Balfour Beatty

Broker Liberum upped its price target on Balfour Beatty from 400p to 475p, and reiterated its ‘buy’ recommendation at the end of January. The broker said that Balfour Beatty was more of an infrastructure than a construction play, adding that infrastructure assets should prove resilient in a recession and that there is a strong pipeline of opportunities for the company.

This echoes Jefferies decision to start coverage of Balfour Beatty shares with a ‘buy’ rating and 375p price target in October. Analysts at Jefferies said the builders improved earnings security and infrastructure group’s lower risk model were underappreciated. The analysts also pointed to Balfour Beatty’s £1.1bn investment portfolio.

Of the 12 analysts tracking Balfour Beatty on the Financial Times, the stock has a 400p median price target. Hitting this would see a 9.5% upside on Friday’s close. The stock has 5 ‘buy’ ratings, 1 ‘outperform’ rating, 1 ‘hold’ rating and 1 ‘underperform’ rating.