Why I’d buy GKN plc and this other great FTSE 100 stock

Bilaal Mohamed thinks GKN plc (LON:GKN) and this other FTSE 100 (INDEXFTSE:UKX) growth stock look grossly undervalued.

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GKN

Image: GKN: Fair use

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FTSE 100 global engineering group GKN (LSE: GKN) may not be the best known, nor the most glamorous business listed on London’s blue-chip index, but you’ll be surprised to learn how many of the company’s products we make use of in our everyday lives. In fact, every time we travel by road or air almost anywhere in the world, it’s highly likely that GKN is helping us on our way.

Donald Trump’s promise

The Redditch-based group designs, manufactures and services systems and components for original equipment manufacturers around the world. The initials GKN may not mean much, but then neither does the company’s former name Guest, Keen & Nettlefolds (GKN). But with 160 manufacturing facilities, service centres, and offices spread across six continents, the £6bn engineering giant is certainly a force to be reckoned with.

GKN serves both the aerospace and automotive markets, but it’s the former that’s hoping to get a boost from an increased US defence budget, thanks to Donald Trump’s promise to hike military spending in the coming years. But I’ve always viewed GKN as a solid long-term investment regardless of who occupies The White House. A diverse range of businesses and wide geographical spread have helped the group to deliver stable and steady growth over a number of years.

You’d expect such quality to come at a premium, but you’d be wrong. GKN trades on a lowly price-to-earnings ratio of 10 for the full year to December, proving that quality doesn’t always have to come at a price.

Let me entertain you

Merlin Entertainments (LSE: MERL) is another FTSE 100 company that perhaps most people are unfamiliar with, but may have unwittingly come across at some stage in their lives. The Dorset-based leisure group is Europe’s leading visitor attraction operator and the second largest in the world.

Merlin boasts internationally famous attractions such as LEGOLAND, Madame Tussauds and Sea Life, as well as nationally recognised destinations such as Alton Towers, Thorpe Park and Warwick Castle. In total, the group operates no less than 100 different attractions, along with 15 hotels and six holiday villages in 24 countries, and spread across four continents.

Brexit-proof?

In an era of uncertainty it’s perhaps wise to be wary of the cyclical nature of the leisure sector as we grow closer to our breakaway from the EU, and the upheavals that Brexit might bring. But 70% of Merlin’s profits now come from outside the UK, and the group’s strategy of portfolio and geographic diversification will only help to increase this figure in the coming years.

With Madame Tussauds in locations as far apart as Nashville and Delhi, and LEGOLAND Discovery Centres in Melbourne and Philadelphia, Brexit is less of an issue for it than it is for some UK firms. And as Merlin widens its footprint and visitor numbers to its vast array of attractions increase, profits should continue to swell. Right now I believe a price-to-earnings multiple of 21 may look expensive at first sight but actually undervalues the company, given the strength of its brands and promise of further diversification and expansion.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK owns shares of GKN. 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.

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