Why Grana y Montero Stock Just Plunged 30%

By Rich SmithMarketsFool.com

What happened

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Shares of Peru's only U.S.-listed engineering and construction company, Grana y Montero SAA (NYSE: GRAM), are down 29.8% as of 11:45 a.m. EST.

So what

Last week, on Feb. 24, a former representative of Grana y Montero's Brazilian partner Odebrecht SA gave an interview to local news magazine Hildebrandt en sus trece. In that interview, the representative, Mr. Jorge Barata, alleged that Grana y Montero was aware of $20 million in bribes that Odebrecht allegedly paid to former Peruvian President Alejandro Toledo to win construction work on a road traveling from Peru to Brazil. Peru's government has called upon Odebrecht to leave the country.

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Grana has already reported losing some $39 million on the construction project. Now it looks like it could lose further work on the project, lose the chance to make good its losses -- and face civil penalties as well.

Caution: Grana y Montero stock is under construction -- or destruction. Image source: Getty Images.

Now what

Grana's shares are already down more than 66% since the year began. At a purported forward price-to-earnings ratio of just 1.1, there doesn't seem to be much distance left for them to fall -- and yet they just keep falling anyway.

Should investors hold their noses against the stench of scandal, and buy into this perhaps cheap stock as it plunges? I wouldn't be too eager to do so. Forward P/Es are based on expectations of profits that may or may never arrive. Meanwhile, Grana's actual results show that last year, the company earned less than $3 million in real profit -- and on a market capitalization of $447 million, that works out to an actual trailing P/E well into the triple digits -- 172 times trailing earnings to be exact.

I wouldn't touch this one with the proverbial 10-foot pole.

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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.