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One bargain-basement growth stock I’d buy and one I’d avoid

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GKN
Image: GKN: Fair use

A profit warning at car-and-plane-parts builder GKN (LSE: GKN) has played havoc with the company’s share price in Friday trade.

The FTSE 100 company was last dealing 8% lower after advising that it “has been made aware of two probable claims which are expected to result in a charge of around £40m in the fourth quarter of 2017.”

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It said that one claim relates to its GKN Aerospace division and the other to its GKN Driveline arm, and that “both claims are commercially sensitive with no additional information disclosable at this time.”

These mysterious lawsuits, allied with recent trouble in North America for its GKN Aerospace division, mean that pre-tax profit for 2017 is only likely to be “slightly above” that of last year, GKN added.

It’s not all bad… Honestly!

Over at GKN Aerospace, trading has been described as “disappointing” in the third quarter due to “a significant reduction in margin caused by on-going pricing pressure, continuing operational challenges and the impact of programme transitions.” It warned that these pressures are likely to persist into the final quarter.

In addition, it said GKN Aerospace North America will incur a £15m non-cash charge at its Alabama facility due to revised assumptions on programme inventory and receivables balances. It added that it anticipates booking a “significant non-cash impairment charge” at the year end owing to its troubles across the Pond.

These horrors are certainly fitting for Friday the 13th. But I also see reasons for investors to remain optimistic. Over at GKN Driveline, sales continued to sail above global production rates of 2% in quarter three and as a result the unit “expects to significantly outperform the market for the full year.”

In addition, organic sales at GKN Powder Metallurgy also continued to tick higher thanks to the impact of acquisitions and currency benefits.

Look, I acknowledge things at the Redditch firm are far from perfect right now, and that the predicted 8% earnings surge for 2017 is headed for the guillotine. But I believe GKN’s market-leading positions in both the automotive and aerospace markets should still help it to deliver brilliant profits growth in the long term.

And I reckon a forward P/E ratio of 9.7 times, even in light of any immediate forecast downgrades, makes the company a bargain right now.

Ready to crash?

I am far less convinced by the investment case of car dealership Inchcape (LSE: INCH), however, given that rising pressure on household budgets is already translating into horrendous sales trouble on the forecourt.

The latest trade release from the Society of Motor Manufacturers and Traders last week showed car sales down 9.3% year-on-year in September, the sixth monthly drop. SMMT chief executive Mike Hawes said: “September is always a barometer of the health of the UK new car market so this decline will cause considerable concern.”

He added that “business and political uncertainty is reducing buyer confidence, with consumers and businesses more likely to delay big-ticket purchases,” and with such uncertainty unlikely to be remedied any time soon, I reckon investment in the likes of Inchcape is a massive risk.

So although a predicted 13% earnings rise for 2017 leaves the FTSE 250 firm dealing on a forward P/E ratio of just 12.4 times, the prospect of tanking demand for big-ticket items such as cars is discouraging me for one from splashing the cash on Inchcape right now.

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Royston Wild has no position in any of the 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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