Investment Column: Meggitt has what it takes to keep flying

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The Independent Online

Meggitt

Our view: buy

Share price: 369.2p (-10.3p)

Last year, the question of whether or not to invest in defence-related stocks turned on the issue of spending cuts. Governments on both sides of the Atlantic were seeking ways to rein in their deficits – and defence appeared to been in the line of fire.

Meggitt, the engineering group which supplies the defence, energy and civil aerospace markets, is a case in point. As traders attempted to a get a handle on the depth of the cuts, the stock tumbled, sliding well below 300p in the summer. But then, once the details were out, the market changed tack, driving the share price up on a combination of relief and signs of an uptick in the civil aerospace market.

Along the way, Meggitt, which yesterday announced a multimillion dollar deal with Gulfstream, announced plans to acquire Pacific Scientific Aerospace, a component business that cemented the company's position as a leading aeroplane parts supplier.

That deal, which was welcomed by analysts, was announced in January and now, aided by the positive updates released earlier this year, the stock stands at around 370p, prompting us to wonder whether the rally has run its course – or if there is still room for gains.

The latter seems more likely. Market jitters have subsided, the broader civil aerospace market is showing signs of life and City is expecting to hear of healthy – even strong – sales growth when the company posts results in early August.

Moreover, the stock is cheap. UBS analysts, for instance, have a 400p price target, which is based on an enterprise multiple of 10.5 times on the estimates for next year.

We think the company is on the right track, and well placed to fulfil the promise held out by its bullish outlook statement in March, when it flagged up the prospect of growth this year and beyond. The shares should respond in turn as Meggitt delivers with its performance.



Brady

Our view: buy

Share price: 77p (+1p)

Brady is a software company, with a twist. It specialises in solutions for the commodity markets, working with banks, miners, refiners and the like. Yesterday, the group put out an interim update, telling investors that revenues in the first half of the year had risen by 90 per cent year-on-year to £8.8m. Furthermore, it pointed out that recurring revenues now made up more than half the total, up from 39 per cent a year earlier.

The company expanded into the energy markets with the acquisition of Viz Risk Management in December, which it renamed to Brady Energy. Yesterday, it said it had integrated the news business, which also brings coal and carbon emissions to its portfolio, ahead of schedule.

Things, then, seem to be moving in the right direction. Brady now has over 150 energy and commodity clients, three times as many as three years ago, making it the largest such company in Europe. It has also secured six new license deals this year. Adding to the attraction, the company had £10.3m of cash and no debt at the end of June.



United Carpets

Our view: hold

Share price: 7.625p (+0.375p)

It has been a brutal downturn for carpet retailers, and it shows no sign of ending. The near-freeze in consumers spending on big-ticket items – compounded by a stagnant housing market, which has always driven carpet sales – has forced the market leader Carpetright to issue a series of profits warnings over the past two years.

Against this background, the achievement of United Carpets, which has 86 stores, to deliver a 4 per cent rise in pre-tax profits to £1.2m for the year to 31 March should not be under-estimated. The retailer delivered this performance by continuing to focus on expanding the number of franchised stores, which helped lift its gross margin by 0.4 per cent to 66.6 per cent.

The company also maintained its final dividend at 0.5 per cent a share. However, while debt-free United Carpet's stock responded positively yesterday, this remain a penny share and has not budged much in the last 12 months.

And although it trades on a modest forward earnings multiple of 8.3 times, we think it's best to err on the side of caution and avoid this well-run carpet retailer until the wider economy, and the housing market, strengthens.

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