Downer EDI [ASX:DOW] is a diversified contractor, providing services to clients in the transport, engineering, utilities, technology and mining sectors. This exposure to mining helps explains why the DOW share price has been under pressure for the past few years.
What’s happening to Downer’s share price?
Today, Downer’s stock price fell around 8% by mid-afternoon, to $3.45 per share. The fall came on the back of an announcement that Downer had lost its contract to continue mining at Christmas Creek, an iron ore operation owned by Fortescue Metals [ASX:FMG].
From September 2016, FMG will undertake the mining and processing of the ore itself, instead of getting a contractor like DOW to do it.
Today’s share price fall calls into question the recovery that has been underway for the past few months. DOW didn’t quantify what the loss of the contract means for earnings in the 2017 financial year, so this uncertainty might keep pressure on the share price in the short term.
You’re likely to see the shares head back towards support (see chart below), at around $3.25, in the coming weeks.
What now for DOW?
The loss of one contract isn’t the end of the world for Downer. It is a large diversified company and has many different earnings streams. However, in a difficult and competitive marketplace, this news will ensure sentiment towards Downer remains negative for the short term.
On the plus side, Downer is a good company with a reasonably attractive valuation. Apart from the cyclical headwinds some of its divisions are experiencing, from a long term perspective it’s worth investing in.
But I would steer clear for the time being. As you can see from the chart above, the DOW stock price is in a prolonged downtrend. I never like to buy a stock that’s trending down.
It is close to support though, so further downside may be limited. The question is how long will you have to wait for a share price recovery? It could be a while, which is why I’d avoid it for the time being.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.
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Editor, The Daily Reckoning