Is this FTSE 250 stock making a comeback or dead in the water?

I think defence and aerospace heavyweight Cobham plc (LON:COB) is emerging stronger after a disastrous few years, but would I buy?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Cobham (LSE:COB) is Britain’s third-biggest defence and aerospace group after Rolls-Royce and BAE Systems. With Rolls-Royce working through the fallout of a turbine blade cracking problem, I decided to look at how Cobham is faring.

In 2016, after a dreadful run of profit warnings, a Financial Conduct Authority investigation (which was subsequently dropped), rights issues and legal disputes, Cobham stopped issuing its dividend following a 40-year run. That must have been a painful decision. Thankfully, this March, the company announced it was ready to reinstate a progressive full-year dividend of 1p. The dividend cover is 3, which makes it unlikely that the company will cancel this payout again soon.

Interesting and complex

Cobham employs around 10,000 people globally, in advanced areas of engineering expertise, carrying out complex technological advancements and services to defence, aerospace, commercial and security markets. 

The company is highly regarded for its air-to-air refuelling technology, software development instruction simulators, satellite communications, defence electronics, aviation services and software products. Creating exploration solutions in some of the most remote parts of the world, including the oceans and outer space, it’s an interesting company, with an impressive catalogue of abilities.

Lacklustre financials

Yet when I began looking at the financials for Cobham, they didn’t bowl me over. A trailing price-to-earnings ratio of 34 is high, which means market sentiment has improved and investors are expecting higher growth from the firm, but also that it could be overvalued at its current price. Earnings-per-share growth was negative at the end of 2018 at -19%, which is considerably lower than the -8% in 2017. This was mainly due to £5.5m lost through exchange rate fluctuations and £22.5m lost from selling off business interests.

US subsidiary, Advanced Electronic Solutions, had been underperforming and was subject to a cost-cutting plan, with anticipated savings of $20m for 2019. 

In February, Cobham announced a settlement with Boeing over a dispute regarding delays with its KC-46 tanker programme. This will costs Cobham £160m, which will continue to weigh on cash generation through 2020. Excluding the Boeing dispute, at least its Mission Systems division was performing strongly, with a 15% increase in organic revenue through the aerial refuelling, pneumatics and actuation markets. 

Underlying operating profit and revenue fell last year, but there was some better news. I think its debt ratio of 54% is fair for this industry and not worrying and gains in the order book and free cash flow were better than expected in 2018. 

Confidence in control

CEO David Lockwood has been in charge since 2016 and comes with a wealth of relevant industry experience. He took over after the board had undergone a serious shake-up and has steered the company through choppy waters, with the horizon finally in sight, even if we can’t fully call the recovery just yet. Newly elected Chairman Jamie Pike brings a decade of defence industry experience to his role and a very impressive CV. I have faith that the collective experience of the board can continue to push the business in a positive direction. 

Barring any unexpected problems, I think Cobham should continue along the recovery path, but the Boeing settlement will constrain cash flow for some time. I believe the company is still a long way off its previous highs. As far as Defence and Aerospace companies go, I’m inclined to favour BAE Systems over Cobham.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

In 12 months, a £10,000 investment in easyJet shares could become…

easyJet shares have plunged in value following a profit warning on Thursday (17 July). Can the FTSE 100 travel share…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

This S&P 500 blue chip looks far too cheap to me at $183!

Our writer picks out one high-quality S&P 500 stock that is currently the cheapest among the 'Magnificent 7' group of…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Down 23% today! This one’s stinking out my Stocks and Shares ISA

Our writer's wondering what to do with a problem named Ashtead Technology (LON:AT.) in his Stocks and Shares ISA portfolio.

Read more »

Two male friends are out in Tynemouth, North East UK. They are walking on a sidewalk and pushing their baby sons in strollers. They are wearing warm clothing.
Investing Articles

Down over 20%, should I dump this FTSE 100 dividend stock?

Our writer has been loving the passive income this dividend stock has been throwing off. But does the big share…

Read more »

Businesswoman calculating finances in an office
Investing Articles

I’ve just bought this FTSE share…

Our writer explains the thought process that led to him buying this FTSE share. One that’s likely to do well…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Just over £5 now, easyJet’s share price looks cheap to me anywhere under £13.84

easyJet’s share price has dropped recently, which could mean the business is worth less than before. Conversely, it could mean…

Read more »

Trader on video call from his home office
Investing Articles

36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock?  

This FTSE 250 firm is a leader in a growing sector and has secured several new sites to drive its…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

3 UK shares that have recently become takeover targets

Mark Hartley examines why these three UK shares have become takeover targets and could be bought out by rivals in…

Read more »