Today's Falling Knife: Severfield-Rowen Crashes 33%

LONDON -- The shares of Severfield-Rowen  (LSE: SFR  ) crashed 40 pence, or 33%, to 80 pence during early London trade this morning after the structural steel specialist admitted it was having "discussions with its lending banks regarding compliance with its covenants."

Severfield, which has supplied steel structures to the Tate Modern, Leeds Arena, Gatwick Airport and Asda during the last year, said its recent performance had been "further, and materially, adversely affected by cost over-runs" at its 122 Leadenhall project.

The company added that it intends to "review expeditiously" its current contract base and update the market when it has "greater clarity on the financial impact" of the investigation.

Severfield also announced the departure of its chief executive, Tom Haughey, who is standing down in order to "to reestablish confidence with all of the group's stakeholders."

Mr Haughey's executive duties have been taken on by Severfield's chairman, John Dodds, who said this morning:

Severfield-Rowen is the U.K.'s market leader in structural steel and the development of its Indian activities is encouraging. Our order book remains stable, despite challenging current conditions, and the Board is confident that the longer term fundamentals of the Group are strong... I am, however, extremely disappointed in the need to make this latest trading update. My task, now, is to reestablish the credibility of the Group with all its stakeholders, bring greater control and discipline to its operations and secure Severfield-Rowen's longer-term financing.

Whether Mr Dodds can revive the business remains to be seen.

Certainly Severfield has been suffering for the last few years, with underlying profits of £53 million and a 20 pence per share dividend recorded during 2008 shrinking into profits of £10 million and a 5 pence per share dividend by 2011.

Indeed, the first six months of 2012 saw the company scrape a £1.5 million profit and warn of "diminishing demand for steel within the construction industry, the reemergence of pricing pressure and the protraction of contractual settlements."

The crashing share price now values Severfield at £72 million, which compares to the group's last net tangible asset value of £57 million. With short-term profits under question, the major balance-sheet items to consider now are property interests of £71 million and debts of £30 million.

Of course, whether Severfield's balance sheet, market cap, over-running contracts and the general prospects for steel fabricators now combine to make the shares a buy remains your decision.

But for today's potential knife catchers, Severfield's shares did rally from less than 70 pence to almost 600 pence between 2003 and 2007. Such recovery form suggests it may pay to keep an eye on Severfield, with any sustained turnaround from here perhaps warranting another multibagger return.

In fact, if you are keen to earn huge returns from higher-risk recovery stocks, this free Fool report could help you on your way. The report explains how taking a contrarian view and backing unloved companies can be a vital step to becoming very rich from shares.

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