Stockwatch: unjustified drop presents opportunity

An apparently bizarre reaction to a trading update this week is yesterday’s 10% fall in the FTSE 250 shares of Senior (LSE:SNR), a manufacturer of hi-tech components and systems, with operations in 12 countries. It clawed back a bit to 168p by the close, yet there still appeared some chunky selling.

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In a five-year chart context, this can seem like a reasonable mean-reversion to 2023-24 levels after the March-April 2025 US tariff sell-off was followed by a 67% rally:

Source: TradingView. Past performance is not a guide to future performance.

For the 10 months to October 2025, in the context of a 31 December financial year-end, full-year performance is expected to be “comfortably ahead” of the board’s previous expectations. While profit is not mentioned, this is a trading update, and a full-year audit could yet result in a different profit outcome.

But the sense of momentum may explain why on 13 October a non-executive director one year in the role, bought £29,200 worth of shares at 195p, followed on 29 October by the chair and his wife spending just over £100,000 at 191p.

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The update guides for 5.9% group revenue growth over 10 months albeit with variance where Aerospace-related products are up 9.4% but “Flexonics” only by 1.5%, which does not even match inflation. Flexonics is jargon for thermal management solutions and fluid conveyance solutions (for vehicles, power generation and industrial markets) and is strategically where Senior wants to focus.

An “Aerostructures” business is currently being divested for £150 million plus a £50 million near-term earn-out, relative to a market cap currently around £700 million. So, this can look a bit odd, as if earnings-dilutive versus Flexonics’ future, although proceeds could cut £200 million of net debt (as of 30 June) where the net interest charge clipped 21% of operating profit. A £40 million buyback programme is targeted which would enhance earnings per share (EPS).

Positioned in cyclical growth markets

As ever with a modern technology group, you get a sense that it must benefit from “the wave of the future”, as customers upgrade. However, they can still face cyclical pressures. This to me is the chief question currently for Senior’s underlying value.

In the 4 August interim results, civil aerospace was cited at 32% of group revenue, with air traffic forecast to continue growing with a 3-4% annual increase in new aircraft demand over the long term. Airbus and Boeing are key larger clients. This industry still has its cycles, and a reason Senior has yet to regain its pre-pandemic revenue of £1,111 million in 2019 relates to aerospace taking a blow. “Other aerospace” adjacent markets account for a further 9% of revenue.

Senior - financial summary
Year-end 31 Dec

Source: company accounts.

Land vehicles account for 27% of revenue where demand in heavy-duty truck markets weakened both in the US and Europe during the first half – amid such US truck production down 19%. Tariffs and removal of subsidies were a factor, and the full-year industry decline is targeted at 24% followed by a flat 2026. In Europe, although first-half heavy truck production fell 15%, the full year is expected to rise 3%.

This has a stronger flavour of an “industrial cyclical” share, where you might generally expect it to be priced for a useful yield as well as the board paying out significant earnings. But at the current share price, Senior’s yield is shy of 2% assuming consensus for a 2.6p dividend in respect of 2026, rising to 3.2p in 2026. The six-year table shows a strong element of capital expenditure – inherent to technology-driven businesses – soaking up operational cash flow, leaving comparatively low free-cash flow, at least since 2019.

Considering the group might achieve EPS of around 10p in 2026 based on £40 million (again below 12.2p normalised in 2019), the forward price/earnings (PE) ratio is around 17x. Possibly Senior [can] drive earnings growth to match or exceed that. Even before this update, consensus targeted over 30% growth in normalised EPS, 2025-26. Mind you, that is quite a near-term range to assume an attractive PE-to-growth (PEG) ratio of 0.5, and Senior is not exactly a consistent growth share to qualify for this ratio.

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Defence at 16% of group revenue has more a growth flavour, supporting military aircraft whose annual production is estimated to grow substantially (if by quite small numbers) by 2028.

Power and energy constitute 16% where global electricity consumption grew strongly in the first half of 2025, driven by rising demand from industry (cyclical) but also data centres and electrification (growth). Amid softening demand for oil, global upstream oil & gas investment is projected to ease by 4% in 2025, chiefly US shale. Overall, this seems cyclical.

Yet in this cyclical respect, the update overall points to good prospects amid higher production of commercial aircraft, defence spending and improved pricing; factors that are expected to persist “for the full year and beyond”.  The question seems quite how long “beyond” involves, given complexities of global debt, inflation, interest rates and growth.

It remains an overall positive how Senior is raising its performance guidance at a challenging time for the global economy.

A bullish consensus among brokers

With four brokers publishing on Senior, all have “buy” stances and, before this latest drop, had price targets ranging from 185p by Jeffries to 275p by Berenberg. The latter implies a 27x PE as attainable, however, unless earnings radically improve thereafter.

This upper target implies that Senior can effectively recover its pre-pandemic earning power, and the “pure play” strategy on thermal management and fluid conveyance delivers better than the Flexonics side has lately. Focusing is aimed to raise normalised group operating margins from around 8% to “at least” a double-digit percentage and return on capital on continuing operations from around 12% recently to 10-15%.

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If such targets can be achieved then a current 0.9x price/sales ratio implies, yes, EPS would get a medium to longer-term boost, hence the PE drop.   

There is a speculative aspect then, and if you are wary about medium-term global prospects then a cautious investor would wait and see. It is hard to define much aspect of “margin of safety” here but note how the sale of the Aerostructures business is to Sullivan Street, a private equity partnership.

Its share price drop – which continues initially this morning with a drop of 2% to around 164p versus the FTSE 250 at 0.5% easier – still strikes me as unjustified unless the strategic refocus is flawed.

Delay in US regulatory approval is a factor

Yes, the chart has implied that some pullback is due if markets are de-risking, but is askance with the fundamentals’ essence – of revenue momentum in a context of margin and return on capital employed (ROCE) improving.

Meanwhile, the sale of the Aerostructures business has encountered delay, due to the US government shutdown affecting regulatory approval. The defence contracts and technology involved are in a stringent US regulatory environment, hence this is a material risk to completing, although the companies remain confident it will happen.

Senior is therefore quite speculative, with less conviction of investment value, but I rate it a “buy” if taking an averaging-in approach.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.