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2 Key Lessons from the Keppel Corporation Limited’s Plunging Stock Price

Keppel Corporation Limited (SGX: BN4) has seen its shares plunge nearly 40% since the start of 2015.

When we look at its business results during this period, we can see why. In 2015, the conglomerate saw its revenue fall by 22% while its profits shrank more than 19%. It didn’t get better for the first quarter this year. Keppel Corporation’s revenue and profit plunged 38% and 41% respectively in the first quarter.

For shareholders, the falling stock price may not be a pleasant sight. But instead of fretting, investors might want to learn from this experience.

Feeling blue

As a member of the Straits Times Index (SGX: ^STI), Keppel Corporation is regarded to be a blue chip stock.

Some investors favour blue-chip companies. For them, blue chip stocks may be prized for its stability and its scale of operations. However, as we have seen with the case of Keppel Corporation, stability is not always a given for blue chip companies. Furthermore, the declining performance at Keppel Corporation over the past year is not a new phenomenon.

If we look back in the last seven years, we can see that performance at Keppel Corporation’s Offshore and Marine segment has, in fact, been quite volatile.   

Revenue Business Unit Keppel Corp

Source: Keppel Corporation’s earnings report

From the graph above, we can see that the Offshore and Marine sector has seen its revenue fluctuate between $5.6 billion to $8.6 billion. This can hardly be considered to be the stable business that blue-chip investors are pining for.  

Moats without customers

Other investors prefer companies with economic moats.

Economic moats, a term popularized by Warren Buffett, refers to the ability of a company to put up high barriers to entry for competitors. In doing so, these companies would be able to maintain its market share and protect its profits (hence, “moat”) for long periods of time.

In Keppel Corporation’s case, the company designs proprietary jack-up rigs. The word “proprietary” implies that that the design is exclusive from Keppel Corporation alone.

Some might see the proprietary design as a competitive advantage or moat.

On the other hand, that has not stopped Keppel Corporation’s customers from deferring delivery of jack-up rigs, which is most likely due to the low oil price environment. If its customers are not able to generate profit from lower oil prices, Keppel Corporation’s jack-up rigs might not be needed.

Therein lies an important point.   

Going back to our analogy, a castle with a moat can look strong and unpenetrable from the outside. But a moat alone may not be enough. Without a steady flow of customers, the value of its moat might become less attractive.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chin Hui Leong doesn't own shares in any company mentioned.