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3 Takeover Candidates Just Like Meggitt plc

rrThe takeover speculation that has prompted a jump in the share price of Meggitt (LSE: MGGT) could evaporate as swiftly as it arose. It’s based on pure scuttlebutt — rumours emanating from the Farnborough Air Show that US conglomerate United Technologies could be interested in the company best-known for making aircraft braking systems.

But a bid for Meggitt is plausible, and the current speculation highlights the company’s appeal both to potential buyers and to investors. Those attractions include:

  • Proprietary, high-tech leadership in a specialised field;
  • An integral part of the supply chain in the global civilian aerospace sector, which has long current order books and good growth projections;
  • Mid-sized (£4bn market cap) and easily swallowed by one of the giants in the aerospace and defence sector;
  • Relatively cheap.

Booming

Meggitt’s shares are back where they started the year. Like much of the sector, its progress has been one of booming civilian aerospace sales offset by cutbacks in defence orders and a search for diversification into non-military applications.

But the shares are up nearly 50% over 3 years and have three-bagged over five years, with plenty more fuel in the tank. They are on a projected P/E of 13.5, yielding 2.8%.

There are a number of mid-sized companies in the sector which share many or all of Meggitt’s characteristics, and would have similar appeal to potential bidders.

Seven bagger

Around two thirds of revenues at £1bn market cap Senior (LSE: SNR) come from its aerospace division, which makes a plethora of parts including wing components. Like Meggitt, Airbus and Boeing are major end-customers. Its shares have seven-bagged over five years, but after treading water over the past twelve months are on a P/E of just 13.2, yielding 2.1%.

Ultra Electronics (LSE: ULE) delivers applications ranging from sonar systems to cyber-security, used in defence, civilian aerospace and other markets. Its shares are up 60% over five years and trade on a P/E of 14 with a yield of 2.1%.

Cobham (LSE: COB) is best known for its air-to-air refuelling systems — very much a defence product — but it has a significant business in communication systems, set to expand with the recent £0.9bn acquisition of US wireless communications manufacturer Aeroflex. Somewhat larger with a £3.4bn market cap, Cobham’s shares are on a P/E of 15.6 and yield 3.6%.

All four companies are of high quality with decent growth prospects, with two possible catalysts that might eventually give an added boost: an unwind of the currency headwinds brought about by Sterling’s strength, and a recovery in US defence spending.

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Tony Reading owns shares in Meggitt, Senior and Cobham. The Motley Fool has no position in any of the shares mentioned.