Two of the UK’s largest engineers, GKN (LSE: GKN) and Rolls-Royce (LSE: RR) have had a rough time over the past few months. Rolls’ recent troubles are just the latest in a long line of setbacks for the company while GKN’s problems seem to stem from a benign global manufacturing environment.
Specifically, at the end of October GKN warned growth rates are set to slow in its principal programmes are ramping up at a slower pace than expected, while sales to military aerospace programmes, as well as agricultural markets, are likely to continue to decline. Since GKN issued this warning, shares in the group are down around 5%.
Multiple issues
Meanwhile, shares in Rolls have lost 10% over the past two weeks after Emirates Airline complained about the quality of the engines the company delivered. As one of the world’s premier engine manufacturers, Rolls should not be receiving such complaints from customers, and this development only adds to the group’s woes. Management is already struggling to keep investors on board after a new accounting standard that forbids the acceleration of revenue recognition came into force earlier this month. Profits would have been more than £700m lower last year if lucrative revenues from long-term service contracts had not been included in Rolls’ figures.
Clearly, Rolls has a lot of problems and investors might find it better to avoid the company altogether. GKN’s problems, on the other hand, could be temporary. City analysts are still forecasting 3% earnings per share growth for the group this year followed by 12% next year to 32.3p. Meanwhile, analysts are predicting a 58% decline in earnings per share for Rolls.
Improving outlook
Compared to Rolls and GKN, BAE Systems (LSE: BA) has plenty going for it. The company’s shares surged after the election of Donald Trump as president of the United States off the back of the belief that with Trump in power, military spending around the world will rise.
While it’s not yet possible to tell what effect Trump will have on global military expenditure, City analysts are forecasting a 6.2% increase in BAE’s earnings per share over the next two years. The shares trade at a forward P/E of 15.1 and support a dividend yield of 3.5%.
Foolish summary
Overall, these three engineers all have very different outlooks. Rolls just can’t seem to get things right, and therefore it might be best for investors to avoid the company.
GKN has hit a speed bump, but analysts are still expecting growth from the company over the next two years. Based on current growth estimates, shares in the group are currently trading at an attractive forward P/E of 10.7 so some investors might find GKN attractive.
Lastly, BAE looks expensive compared to current growth forecasts but if there is a bump in military spending over the next few years, the company could be in line to reap hefty rewards.
