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While searching for the best stocks to buy, I recently noticed a value stock: Costain Group (LSE: COST).
Let's dive deeper into the business, as well as my investment case.
Building the future
Costain is a sustainable infrastructure solutions provider with decades of experience. It plays a vital role in building essential infrastructure that we use every day, such as roads, bridges and more.
The shares have had a fantastic run over the past 12 months. This time last year they were trading at 46p, compared to current levels of 85p, an increase of 84%.
My investment case
Costain’s experience working with government, the construction and infrastructure industry, as well as its historical track record, are major plus points for me. The firm has extensive experience in many different types of infrastructure and is regarded as a leader in the industry. Costain continues to win lucrative contracts, including its latest, a tender to help upgrade water and wastewater assets for Southern Water.
In addition, the need to increase spending on infrastructure in the UK could help Costain to increase its revenues and profitability in the future. This is linked to the ageing of our infrastructure as well as the growth of the UK population, something that needs to be addressed.
Moving forward, the fundamentals also look good. The company has a good track record of past performance. However, I understand that the past is no guarantee of the future.
I think Costain shares offer good value for money, trading on a price-to-earnings ratio of just 10. However, I think this valuation will increase if its share price and performance continue to rise.
Finally, Costain’s board of directors reintroduced the dividend early last year. This is another sign that the company is on the up as it decided to reward its shareholders. Currently, a dividend yield of 1.4% supports my investment argument. However, I understand that dividends are never guaranteed.
Risks and what I'm doing now
I have two main concerns that I believe could slow Costain’s progress and momentum. First, he is at the mercy of economic volatility. Also, one-off events such as the pandemic could halt, or at least delay, infrastructure spending. Recent turbulence due to inflation and higher interest rates has put a spotlight on government and infrastructure spending. With the new Labour government talking about a financial black hole, some projects could be in the crosshairs.
Furthermore, while inflation appears to be under control at present, rising costs could squeeze profit margins, which is worrying as these profits support growth initiatives as well as returns for investors.
Overall, I believe the advantages outweigh the disadvantages. I would be willing to buy some Costain shares when I have funds available. A good track record, industry experience and existing relationships, an attractive valuation, and a passive income opportunity all help my decision.
