Meggitt shares among top mid-cap performers

After a poor winter, investors got nervous when the shares approached record territory again. Graeme Evans asks: can they do it this time?

After a few days in which good news has been hard to find, mid-cap stock Meggitt bucked the gloom today with a stunning reminder about the continued potential of the British engineering sector.

In an unscheduled trading update, Meggitt brushed aside the ongoing Brexit and stockmarket uncertainty to upgrade its revenues forecasts for the second time in four months.

The Dorset-based company, which employs more than 11,000 people across Asia, Europe and the Americas, is benefiting from stronger demand among defence customers and for parts in the civil aerospace aftermarket.

Shares rallied by 6% in the FTSE 250 firm to recoup some of the losses seen in the October market sell-off, before which Meggitt had been trading 19% higher for the year and comfortably better than the rest of the second tier.

Investec Securities, which had a price target of 610p prior to today, said the improved performance increased long-term confidence in Meggitt and supported a re-rating towards its commercial aerospace peers.

UBS and Morgan Stanley are more cautious, with price targets of 470p and 500p respectively. The latter bases its figure on the three-year average price earnings multiple of 13.3x to 2020’s forecast earnings per share (EPS).

Source: TradingView (*)      Past performance is not a guide to future performance

Meggitt now expects organic revenues growth of between 7% and 8% in 2018, up from 4%-6% previously and 2%-4% at the beginning of the year.

The company produces wheels, brakes and brake control systems for business jets and military and regional aircraft. Other products from its five divisions include aircraft fire protection systems and fuel tanks and fuel systems.

It said today that civil aerospace original equipment revenues grew by 5% in the third quarter, thanks in part to growing demand for business jets.

Further growth in air traffic and low levels of aircraft retirements also increased demand for its spare parts, with civil aftermarket revenues up 9% in the quarter.

Continued demand for retrofit fuel tanks boosted defence revenues by 8%, with the positive outlook for defence spending in the US helping to contribute to full-year revenues growth of between 7% and 9% this year.

While Meggitt’s guidance for margins is towards the lower end of the range of 17.7% to 18%, Investec Securities said it still expects upgrades of 3-4% in the City’s consensus forecasts for earnings and EPS in 2018.

UBS analyst Celine Fornaro said the latest results were encouraging but warned that it may make prospects for 2019 harder to achieve should higher fuel prices prompt airlines to retire older planes.

She added that questions remain about how Meggitt is coping with pricing pressure from original equipment manufacturers, as well as the trends in the business jets market.

Meggitt, which became a quoted public company in 1947, has products on more than 67,000 aircraft as well as many ground vehicles and energy applications.

The company has 11 of its 44 manufacturing facilities in the UK, with the bulk of the sites and more than half its workforce being in the United States. Around 10% of its turnover is generated from the UK.

*Horizontal lines on the chart represents previous technical support and resistance. Red line represents uptrend since 2009.