Aerospace engineering group Meggitt (LSE: MGGT) has been one of my favourite choices to play the recovery I expect to see in airline travel. But the Meggitt share price has risen by 115% over the last year and is up by 14% today on bid rumours.
I like Meggitt because many of its products are embedded in modern airliners and require repeat purchases. I think the business has a strong future. But after such big gains, have I left it too late to buy? I’ve been taking a fresh look at this situation.
Bid rumours lift stock
It’s common to see the share prices of small companies bounce around for no reason. But it’s unusual for big companies like Meggitt, whose shares are traded in decent volumes each day.
Sure enough, Meggitt’s 14% share price gain this morning has been triggered by those bid rumours. According to a Reuters report, a US website has reported that US aerospace engineering group Woodward Inc may be considering a deal.
Woodward has a market-cap of around £5.7bn, compared to £3.6bn for Meggitt, so the two companies aren’t that different in size. According to the newswire, Meggitt has refused to comment so we don’t know any more yet.
However, if there’s any substance to the story, my understanding is that London Stock Exchange rules will require Meggitt to make a statement fairly soon — early next week, at least.
Meggitt share price is still below 2019 levels
Although Meggitt stock has risen sharply over the last year, it’s worth remembering the shares crashed hard when Covid-19 shutdown the world’s airlines last year.
Meggitt’s share price fell from over 600p in February 2020 to hit a low of around 220p. Although the stock is now trading around 520p, Meggitt’s market valuation is still lower than it was before the pandemic-related crash.
Although management expects a full recovery to take several years, I can still see value in Meggitt’s business for a trade buyer with a long-term view.
Time to buy?
Meggitt has a history of double-digit profit margins and strong cash generation. Its components are used in most modern airliners and also in 80% of military fighter jet programmes.
Despite last year’s difficult conditions, Meggitt hasn’t run up excessive levels of debt and hasn’t needed to raise cash by selling new shares. In my view, this is a good business. But everything has its price.
Aviation body IATA believes it’ll take until 2024 for air traffic to return to 2019 levels. I reckon Meggitt’s profits may also take a similar time to recover to the peak levels seen in 2019.
Today’s share price surge has left Meggitt trading on 20 times 2022 forecast earnings. Buying at this level might make sense for a trade buyer like Woodward. It should be able to make cost savings and reinvest earnings in future growth.
But, as an outside investor, I think Meggitt shares are too expensive. I’ll be watching with interest, but I won’t be buying today.
