Why Shares of Granite Construction Are Crumbling on Tuesday

Disputes related to large infrastructure projects will wipe out second-quarter profits.

Lou Whiteman
Lou Whiteman
Jul 30, 2019 at 4:08PM
Industrials

What happened

Shares of Granite Construction (NYSE:GVA) traded down more than 18% on Tuesday afternoon after the general contractor and construction material producer warned that charges related to issues at key large projects would wipe out second-quarter profits. The company also said it has accelerated its strategic review of its heavy civil operating group in an effort to de-risk its portfolio.

So what

Granite, in a statement published after markets closed Monday, said it will take a charge of between $2.20 and $2.30 per share in the second quarter due to "events related to four legacy, unconsolidated heavy civil joint venture projects." Including those charges, the company is expected to lose between $2.05 and $2.10 per share in the quarter on revenue of $785 million to $790 million, compared to analyst expectations for a $0.78 per-share profit on sales of $956 million.

The company is set to report second-quarter results on Aug. 2.

A forklift on a construction site.

Image source: Getty Images.

Granite said the charges stem from four projects bid between 2012 and 2014 that have experienced increased project completion costs and "a recent unfavorable court ruling on a project dispute." The company did not reveal any further details; however, Granite CEO Jim Roberts said during the company's first-quarter earnings call back in April that some issues were working through the legal system, saying large projects "tend to always have some type of dispute."

The company is also taking steps to make sure such disputes don't continue to weigh on results. Granite said it is seeking to de-emphasize the unit responsible for taking on large, complex projects, because "the industry pricing and associated risk for this type of work does not align" with shareholder expectations. The company instead intends to focus on lower-risk, smaller-scope projects that it says tend to generate better margins.

"These immediate actions are in addition to the changes we began implementing more than two years ago in how we approach projects of significant scale in our portfolio," Roberts said. "As we move forward, we plan to eliminate the company's exposure associated with constructing complex 'mega-projects' to improve the stability and trajectory of our results."

Now what

Large-scale infrastructure projects were supposed to be a key driver of growth for Granite and other construction companies, but a combination of a lack of coordinated government funding and the potential for disputes on massive programs have destroyed that growth thesis. Granite can't undo past decisions that led to these charges, but the company is hopefully taking action to avoid similar charges in the future.

Roberts said that he is "very encouraged" by the underlying performance of the construction, materials, and water businesses that Granite intends to focus on. But for the time being, Granite Construction will be focused on cleaning up the debris on its books.