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Which of these is the best engineering buy?

When I look at our engineering companies, I see a lot of shares that I think are undervalued — the Brexit thing must be weighing on some of them, but there’s been a general malaise for years.

Consultancy profits

With that thought, I was cheered today by a trading update from WS Atkins (LSE: ATK), which gave the shares a 2.4% boost to 1,590p. In fact, they’re up 26% since taking an immediate post-Brexit hammering, and are now even up 11% since before the vote result — and the price has nearly trebled in five years.

The design, engineering and project management consultancy says things are still going in line with expectations, and reckons it’s “confident for the second half, despite continued uncertainty and volatility in some of our markets,” adding that the referendum result has so far had “minimal impact.

Current forecasts suggest a 7% rise in EPS, putting the shares on a P/E of 13.4, with a further 5% growth the following year dropping that to 12.8. Dividends are yielding a little under 3%, which might not look too exciting, but they’re nearly three times covered by forecast earnings. And at its last year-end, Atkins had a strong balance sheet with net funds of £191.7m — and that helps swing the shares into good value territory for me.

All in all, Atkins looks like a solid and well-managed company to me, and I’m encouraged by its steady record of rises in earnings per share year after year. Half-year results are due on 17 November, and I’ll be keeping an eye open for them for sure.

Old favourite

Next I turn to an old favourite of mine, BAE Systems (LSE: BA), which is trading on what I see as an attractive fundamental valuation.

Earnings have been up and down over the last five years, but part of that is down to the cyclical nature of payments for the kind of long-term contracts that BAE necessarily engages in. We’ve been in an overall flat phase for earnings for a few years now, but considering the toughened economic times that have befallen the aerospace and defence industries, I think BAE’s performance has been admirable.

Dividends have been growing modestly but steadily, and current forecasts suggest yields of a little over 4% for this year and next — close to twice covered, so they look safe enough. BAE has a policy of maintaining dividends with sustainable long-term cover of around two times by underlying earnings, and of returning surplus capital as and when appropriate, so it looks to me like a good investment for those with a long-term horizon.

Things were looking solid at the halfway stage at 30 June, with underlying earnings per share up 1.8%, and the interim dividend was lifted by 2.4%. Net debt rose a little, but chief executive Ian King told us of “encouraging signs of a return to growth in defence budgets” in the US, which bodes well.

Which of these two would I choose? I see the two as being fundamentally different, despite their focus on the engineering industry, and I think a portfolio could benefit from a bit of both.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.