I’ve always had a soft spot for good old British aerospace engineering, and though defence-driven businesses have been through a bit of a lean patch, here are two that I reckon have great long-term futures.
Looking at the fundamentals for Meggitt (LSE: MGGT) shares, I reckon I’m seeing good value compared to the FTSE 250‘s long-term ratings for P/E and dividends. A forward P/E of 14.5, expected to drop to 13.2 by 2019 looks reasonable for a stock offering dividend yields of 3.6% to 3.8%, but there’s more to it than that.
Those dividend are twice covered by earnings, and they’ve been growing ahead of inflation for the past five years — by around 4.8% per year recently. And forecasts suggest that trend will continue for at least the next two years.
A trading update Thursday lent support for that, telling us of a strong first quarter which saw organic revenue up 6% (excluding foreign exchange and disposals). The company put that down to “a robust performance in the civil aftermarket and energy end markets.“
Civil aerospace revenue grew by 4% organically, with military revenue up 2%. Meggitt enjoyed growth in its fighter jet business coupled with good intake in the fourth quarter of 2017, though there have been delays in some projects which impacted Q1 this year.
Energy revenues grew by 39% organically, but that’s against a weak previous comparative period.
The company reckons on seeing 2% to 4% organic revenue growth for the full year, which makes me wonder if current forecasts for an 8% EPS decline are too pessimistic. I see good value here, from a company in a strong defensive position.
Impressive recovery
Following on from a great set of 2017 results, we had an update from Senior (LSE: SNR). Its shares are more highly rated than Meggitt shares at a forward P/E multiple of over 19. That’s almost certainly due to the firm’s encouraging recovery, after a couple of tough years which saw earnings drop significantly, and to stronger forecasts for the next couple of years.
There’s EPS growth of 8% on the cards for the current year, while the subsequent 17% expected for 2019 would drop the P/E to a bit over 16.
Again, we’re seeing a strongly progressive dividend record over the past five years, with Senior’s rate of progress coming in a little ahead of Meggitt’s — the Senior dividend has grown from 5.12p in 2013 to 6.95p in 2017, and that’s expected to grow to around 7.9p by 2019. Yields are a bit lower at 2.4% to 2.7%, but cover is equally strong and a faster growth rate could soon push effective yields (on today’s share price) up further.
Senior’s update confirmed that trading so far in 2018 has gone according to expectations. It did see a decrease in military aircraft spending, but the large commercial aircraft business was described as positive. The firm’s Flexonics Division “benefitted from growth in the truck, off-highway and upstream oil and gas markets, partially offset, as expected, by the decrease in passenger vehicles,” and that seems positive overall.
With Senior’s performance expected to be weighted more towards the second half, the firm expects “good progress to be made in 2018.” Its order books are strong, and improvements in both its divisions are expected. I rate Senior a buy too.
