This FTSE 250 stock is down over 55% in 2020. Here’s what I’d do now

Jabran Khan delves deeper into a FTSE stock linked to the currently struggling aviation industry and explains why he would buy now.

| More on:

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.

Due to the Covid-19 pandemic and government lockdowns, aircraft have been grounded for many months. Although restrictions have eased and flights have resumed, airlines are still not utilising their full fleets. With that in mind, it’s not surprising that aviation stocks on the FTSE have taken a huge hit. However, with the beginning of a recovery finally in sight, I’m starting to look at interesting opportunities in the aviation industry.

One stock I like the look of is Meggitt Group (LSE:MGGT).

FTSE 250 opportunity

Meggitt Group is an engineering firm that operates in three divisions: civil aerospace, defence, and energy. Aerospace produces core components that many aircraft rely on. MGGT’s markets for aerospace include civil aircraft, helicopters, engines, and business jets. Over 50% of the group’s revenue comes from its aerospace division. Defence is the second biggest revenue generator for MGGT, with over 30% from military aircraft, vehicles, naval, and space markets.

Since the turn of the year, MGGT has lost over 55% of its share price value, primarily due to the market crash. A pre-crash high of nearly 700p per share in January is a stark contrast to its lowest point of 217p in April. We are four months on and shares can be purchased at just 277p per share. I believe there is a good opportunity to pick up cheap shares.

MGGT’s defence division is where I feel the opportunity lies. Aerospace has been most affected but I believe the aviation industry as a whole will slowly recover.

Performance

Last week, MGGT released interim results for the six months ending 30 June 2020. As expected, its aerospace division has been adversely affected while defence performed well. This offset some of the losses of aerospace and energy. Overall, group revenue was down 13%. Defence revenue grew 7% whereas aerospace saw revenue decrease by 27%, and energy was also down 6% compared to the previous year. Underlying profit was 37% lower at £102m compared to the same period last year.

Due to the economic downturn, initiatives to conserve cash meant MGGT is on track to deliver cash savings of £400 to £450m for the full year. MGGT also has a good amount of liquidity to see it through the current period with almost £900m in cash available across its revolving credit facilities (RCF). In line with many other FTSE-listed companies, MGGT decided to suspend an interim dividend to retain cash.

Here’s what I’d do now

During the economic downturn I have actively discouraged purchasing airline stocks across the FTSE because there were just too many unknowns. Now that restrictions are easing, and given pent-up demand, I’m more confident in a recovery in the aviation industry.

Meggitt Group has a good track record of profit, stability, and a burgeoning defence division. It says that its parts are fitted to “almost every jet airliner, regional aircraft and business jet in service”. This fills me with confidence for the aerospace arm of the business.

That said, I think defence will be a priority for many governments due to the pandemic and economic uncertainty. If you are looking for a contrarian buy this may well be one for you at its current rock bottom price. You may have to show patience with this one, though.

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.

Jabran Khan has no position in any 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

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »