Aerospace and defence engineering company Meggitt (MGGT) is seeing an uptick in demand for its various specialist components, so buy into the current upwards share price momentum.

However, we must stress this is a high risk investment as Meggitt has a history of profit warnings amid unpredictable end markets.

Nonetheless, the current situation looks promising. The civil aviation market is doing well and Meggitt recently signed a $50m deal with airline Wizz Air (WIZZ) to supply its Airbus 321neo fleet with wheels and brakes.

Meggitt has also enjoyed the benefits of increased US military spend. In February it received a $26m contract to provide thermal management systems for the US army’s M1 Abrams tanks.

The company’s global appeal was shown in April when it secured a multi-million dollar contract with Korea Aerospace Industries to supply wheels and high performance carbon brakes for the KF-X multirole fighter jet.

This jet programme is a partnership between South Korea and Indonesia with more than 150 jets being delivered to the countries from the mid 2020’s.

On release of its 2017 full year results in February this year, Meggitt chief executive Tony Wood said he expected organic growth in 2018 of between 2% to 4%. This was reiterated during the first quarter update when Meggitt revealed it had achieved organic revenue growth of 6%, which bodes well for meeting its full year target.

The company has been streamlining by disposing of non-core assets in order to focus on businesses of scale in attractive markets.

Andrew Follan, analyst at investment bank Berenberg, says ‘the long-term growth outlook for Meggitt is positive, with more than 50% of revenues in the growth civil aerospace market and 35% in the improving defence sector. In addition, more than 40% of sales are derived from high-margin recurring aftermarket activities.

‘However, earnings and cash progression are still constrained in the short term by ongoing product investment and mix headwinds in civil aerospace and still some softness in energy-related markets. Over time, these trading headwinds will ease and profit growth and cash generation will improve.’

Analysts recently pushed through fairly large earnings downgrades although there is no reason to be alarmed. Earnings forecasts were reset to factor in a new accounting standard called IFRS 15 which affects the way companies recognise revenue from long-term contracts.

The company is trading on a discount to its peer group in the aerospace and defence sector according to data from Reuters which has Meggitt trading on 15.1 times forward earnings. This compares favourably to the peer average of 20-times. (DS)

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