Why I’d still avoid Cobham and raise a glass to this FTSE 250 share instead

In a volatile market, the defence sector may seem to be a good defensive pick and Cobham (LSE: COB) could look like an affordable way to get into it. But is it? The firm’s shares have not rewarded long-term investors since 2015, despite management’s efforts to boost its financial strength and while many readers may wonder whether aerospace/defence will be among the better performing sectors in 2019, I do not think much will improve for this particular firm just yet.

Any more profit warnings?

Over the past two years, the group has issued one profit warning after another and while investors have been waiting for management to capitalise on the company’s core strengths, it just is not happening.

Cobham is a leader in two niche areas. It holds a virtual monopoly in air-to-air refuelling of aircrafts and is the sole provider of sophisticated data and voice communications equipment to Airbus as part of the latter’s aviation safety and connected cockpit programme.

However, in recent years management has been on a rather expensive acquisition spree which added a significant debt burden and diluted these two niche segments. And its balance sheet problems are unlikely to end until it can deal with its Boeing issues. The two companies are tangled in a disruptive dispute about their partnership on Cobham’s KC-46 aerial refuelling programme. Boeing has been making “unquantified damages assertions” and withholding payments.

As a result of slumping sales, falling profits and unpredictable earnings, the shares fell over 25% in 2018. However, the company still has a P/E ratio of almost 28 and so doesn’t have the kind of value appeal enjoyed by some other falling stocks. In 2017, it cancelled its dividend payment, which it had made for over 40 years in a row.  As it has not yet resumed payments, it is not a dividend recommendation either. 

If you are considering Cobham for your 2019 portfolio as a potential value or defensive play in this volatile market, you may want to wait for more guidance from the company before you hit the buy button. 

Higher earnings for Britvic

If you want to find plenty of British companies with growing profits, then the FTSE 250 is a good place to look. I would, for example, take a closer look at Britvic (LSE: BVIC), a leading producer of soft drinks.

You are probably familiar with its products, including Robinsons, Tango, and J2O. The group also holds the exclusive rights to make and market Pepsico‘s global brands in the UK.

In late November, it reported a 5% increase in revenues and increased its dividend, giving investors a 3.5% yield. BVIC’s bottom line had not been affected by the UK government’s recent sugar tax as consumers continued to buy and as others have moved to lower sugar alternatives, I believe the firm will continue to benefit from an increase in sales of its sugar-free fizzy drinks.

In addition to its UK operations, through franchising, export sales and licensing, management has been increasing its reach overseas, including sizeable operations in Ireland, France, and Brazil.

The P/E ratio stands at 18 for now. I expect the company to continue to grow and to increase earnings in years to come so I am currently comfortable with this number. If you are looking for shares to buy and hold, I would include Britvic in this year’s portfolio list.