Investment Column: GKN's global reach helps it to steer around the double-dip threat
Thursday 20 October 2011
Our view: Hold
Share price: 185.9p (-9.2p)
Given the sharp decline in confidence since we last looked at GKN, the automotive and airplane parts maker has held up remarkably well. Its third-quarter results yesterday were surprisingly good, with group sales for the three months ending 30 September up 10 per cent at £1.48bn and trading profit (before a one-off charge relating to an explosion at a plant in the US) up 13 per cent to £113m.
That's not bad for a traditionally quiet quarter, particularly given the grim economic tidings. What's more the group's view on the outlook, at least in the short term, is remarkably upbeat. There has so far been no evidence of a slowdown in its order book.
Automotive parts is the biggest of GKN's businesses (the other two being in aerospace and land services) and its exposure to the luxury market appears to be working out well – those rich enough to afford top end cars don't seem to be suffering as much as the rest of us. Orders from China, Germany and the US have remained solid.
The other businesses are performing in line, with aerospace expected to pick up soon.
What is attractive about GKN is its global reach and exposure to parts of the world that won't necessarily suffer from a European, and perhaps US, double dip downturn. It's not a safe bet but it's safer than some.
And the company's valuation is hardly stretched at 10 times this year's forecast earnings, falling to just 8 times next year with an acceptable prospective yield of 3.3 per cent rising to 4.4 per cent next year. That is well below its historic average multiple of nearly 16 times.
We said buy at 201.5p in March, having originally turned positive at 109p a year before that. The shares have slipped a bit since then but, we'd keep the faith with GKN's quality. It has continued to produce good results and is a share to back long term.
Our view: Hold
Share price: 177.9p (+5.6p)
Cobham's claim to fame in its home country is the fact that it trains naval helicopter pilots, including one William Wales, to fly. But Britain is not really that big a deal for the defence contractor, which generates most of its revenues from the US.
Whichever side of the Atlantic you're on, however, cuts are coming. Even countries seemingly devoted to sending in the troops at the drop of a hat cannot keep giving generals and admirals every toy they might want given the black holes in their public finances.
What had the market all of a flutter yesterday was Cobham's sale of its "Analytics Solutions" business – essentially a company called Sparta it bought a few years ago – for $350m (£221m). That's better than expected and the company will book a $20m one-off gain from the deal.
The sale was forced by a change in US tender rules which now essentially prevent companies supplying equipment from advising on procurement. But unloading this business not only disposes of a potential problem for Cobham, it disposes of a problem for potential US bidders such as Raytheon or Lockheed Martin.
At just under 10 times this year's forecast earnings, falling to just over 9 times next year's, the valuation is hardly stretched, with an acceptable prospective yield of 3.8 per cent rising to 4.1 per cent
It's always risky buying a company on the basis that it might sometime be a takeover target. But while Cobham is a way below the 224.6p at which we said hold in March, it is now worth keeping faith with.
Our view: Speculative buy
Share price: 82.5p (0p)
A note of caution from StatPro, which makes software for the fund management industry. It has warned that the recent uncertainty is going to make it "more challenging to accurately forecast levels of new business and renewal rates". All the same, the group's results so far are in line and it has seen an increase in demand for risk-based products and services.
We've been advising a hold on this company for the last couple of years. However, what makes it interesting is that while revenues are expected to be modest this year for its "StatPro Revolution", product, they could take off next year.
The "cloud-based" portfolio analysis and research service seems to apply itself well to the fund management arena. It could prove particularly attractive to smaller asset managers who can't afford the all singing, all dancing StatPro Seven product.
StatPro trades on 14 times forecast full-year earnings. This might look a little frothy but is by no means outrageous for a technology company. What's more, it falls to 11.6 times next year and there's also a dividend – which isn't all that common in AIM listed software concerns. We make StatPro a speculative buy. But a good one.
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