Up 345% with a P/E of only 13.8! I bet my favorite FTSE 250 stock continues to smash
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There I bought my favorite FTSE 250 the stock a few years ago, it wasn’t even in the index. Now.
Infrastructure solutions specialist The Costain group (LSE: COST) has also come in FTSE 250 on March 2 after disappearing for 20 years. It marks a remarkable transformation of a business that has taken a proper old rhythm. Thankfully, I got in early, and bought shares in November 2023. Is it too late to get on board?
Costain was caught up in the outsourcing crisis that sank Carillion in 2018. The pandemic made things worse. In 2020 shares crashed more than 80% as projects stalled and profits evaporated. A crushing loss of £90m on two major road projects has ended the route.
Costain Group shares are lights out
There was one thing that caught my attention after that. Costain was sitting on a pile of cash that was almost equal to its market value. That seemed to be both a safety net and a springboard. The recovery has been extraordinary. The share price has increased 345% in three years and almost 95% in 12 months.
The market cap now sits at around £531m, so it’s still a relatively small business. That could leave room for growth if momentum continues.
The rally gathered new momentum after yesterday’s (March 10) impressive 2025 results, with shares jumping nearly 18%. Costain announced another year of financial progress across water, defense, energy and transportation projects. The forward order book increased by 30% to a record £7bn. That’s seven times annual revenue of £1.05bn, giving it an unusually strong outlook.
Adjusted operating profit rose by 9.3% to £47.1m while margins improved to 4.5%. Strong cash generation strengthened the balance sheet and allowed management to maximize shareholder returns.
The group confirmed a £20m share buyback and increased its dividend to 4.2p per year. That’s a 75% increase on the 2024 payment of 2.4p (helped by the pension caps being removed). It now plans to use a three-fold revenue cap to keep payments stable while the business expands. The trailing dividend yield stands at around 2.11% and analysts expect that to increase to close to 2.5% by 2026.
The equation still looks reasonable
Despite the strong run, the valuation still looks modest. Shares trade at a price-to-earnings ratio of 13.8. Management believes that performance could increase again later in the decade as customers increase investment in transport infrastructure, water and power networks. Operating margins should be more than 5% over time.
Infrastructure contracting always has risks. Pricing complex projects is difficult and mistakes can prove costly. Costain found that out the hard way. The UK economy is struggling and government budgets remain stretched, threatening the use of new infrastructure. Income will always ebb and flow depending on when projects are awarded and completed.
Still, the record order book gives an encouraging impression. The momentum is clearly behind the business. I thought the rally might cool off last year, but stocks are working. The rating still looks reasonable and the career path is great. I think Costain is still worth considering. Now I’m looking for the next big recovery story.
