FTSE 100 and why Carillion shares are worth just 1p

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FTSE 100 and why Carillion shares are worth just 1p

Investors remain jittery after a disappointing 10 days. Euphoria created by the rally from mid-September lows has been replaced by renewed speculation that this bull run is over. Given the FTSE 100 (UKX) is down around 75 points on the week lunchtime Friday that's jumping the gun. The time to panic is not now.

An assault on record territory last week fell short by just 17 points, but it signalled that this market was losing momentum. Once buying dries up there's only one way to go.

Significant drivers of sentiment remain the ongoing investigation into Russian interference in American politics and the odds of Donald Trump's tax plans passing US lawmakers. Regular profit warnings, stretched stockmarket valuations and Brexit remain obvious domestic concerns.

However, from that best of 7,582, the blue-chip index is currently down only 185 points, or 2.4%. There are still few assets offering better returns than equities, and we are in the seasonally strong fourth quarter. We certainly saw increased volatility at this time of year in 2013-15, but bailing out before Christmas is not a typical strategy.

Americans are naturally optimistic, and that's borne out in markets there at or very near record highs. Latest comment from Cisco (CSCO) and Wal-Mart (WMT) is food for the bulls, and analysts at Deutsche Bank still believe "some version of tax reform can be achieved, but this is likely to be a Q1 event with potential stumbling blocks along the way".

Over here, another warning from engineer GKN (GKN) triggered further share price declines. An embarrassing volte-face also saw CEO-in-waiting Kevin Cummings unceremoniously dumped after problems on his watch at current post as head of the aerospace division.

Weak commodity prices have been no good for mining heavyweights like Anglo American (AAL), Rio Tinto (RIO) and BHP Billiton (BLT) which dominate London's leading index. And a dip in oil prices has taken the shine off BP (BP.) and Royal Dutch Shell (RDSB) this week. Damage should be limited, however, given the likelihood that OPEC will extend the current agreement on production cuts at its next meeting on 30 November,

The real disaster story this week is Carillion (CLLN). Just weeks after we reported that "risk outweighs reward", the accident-prone profit-warning addict has done it again, warning Friday that profits will be "materially lower than current market expectations".

That means it will breach banking covenants and will likely require "some form of recapitalisation". Carillion's massive pension deficit makes a rights issue tricky, so some form of balance sheet restructuring is on the cards "during the first quarter of 2018". Expect a debt for equity swap.

After bottoming out at 16.5p, the share price has bounced to 28p, but that could be as much short-covering – investors who'd bet on further sharp declines in Carillion's share price buying shares back to bank profits – as anything else.

Taking a long position in Carillion remains as high-risk a trade as ever.

Broker Liberum certainly thinks so. 'Sell' it screams, slapping a price target of just 5p on the shares. UBS goes further, given a significant deterioration in cash collection.

"Our valuation was already in slight negative equity value today and with higher debt and lower earnings this would widen," it says. "We set our price target at 1p".

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.