International aerospace, defence, and energy markets specialist Meggitt (LSE: MGGT) is renowned as a strong, long-term generator of cash, with a progressive dividend policy to boot. It’s well worth a look, but it’s the second stock in this review that really grabs me.
Yet don’t overlook Meggitt, which has been going great guns over the last year, its share price up 20%, despite suffering knock-on effects from the Boeing 737 MAX groundings.
Today’s update was otherwise fairly positive, with Q3 trading stronger than previously anticipated, and overall group revenue growth of 11%, boosted by a particularly strong performance in its defence division, where revenues grew 20%.
The £4.83b group is upgrading its guidance for full-year organic revenue growth, if only slightly, from 4%–6% to 6%–7%. However, margins will be squeezed by the Boeing groundings and “pressures across our internal and external supply chain driven by the unprecedented ramp up in new aircraft production”, with full-year operating margins expected to be at the lower end of guidance, between 17.7%–18.2%.
Investors no doubt wanted more, given that the group trades at a relatively pricey 17.7 times forward earnings. The yield is 2.8%, with cover of 2.1. That may seem low, but as I said, management is progressive. Earnings can be variable due to contract timings, but City analysts are forecasting 7% growth this year and 11% next.
Today’s results may seem slightly underwhelming but the long-term flight path still looks solid to me.
GAW, GAW, not war, war
Meggitt’s not half as exciting as my other FTSE 250 stock pick, Games Workshop Group (LSE: GAW), which manufactures miniature war games such as Warhammer Age of Sigmar, and describes itself as “the largest and the most successful tabletop fantasy and futuristic battle-games company in the world”. The £1.73b group is up a thundering 725% over the past five years, and is continuing the momentum, with 45% share price growth in the last 12 months.
Defensive investors traditionally migrate to tried and trusted sectors such as pharmaceuticals and utilities, but maybe you’d be better off targeting niche companies like this one, with its army of die-hard, ever-so-slightly nerdy hobbyists. Its loyal fanbase insulates the company from many retail pressures, while its network of stores backs up its online operation.
Games Workshop’s latest trading statement is brief to the point of brutality, reporting that sales and profits are ahead, with royalties receivable doing particularly well due to the timing of guarantee income on signing new licences, while its results for the six months to 1 December 2019 are sales of not less than £140m and profit before tax of not less than £55m.
Better still, the group is expanding internationally, with stores in the US and Europe, so it’s no fantasy to suggest current growth rates really could continue. The group trades at 23.7 times forward earnings, but in fact I was bracing myself for a more expensive valuation, and I like its return on capital employed figure, of 90.3%. Some reckon this visionary group could be on course for the FTSE 100.
The yield is 2.9%, covered 1.4 times, which is solid when you take into account its recent blood and guts share price growth. The Games Workshop share price could help you battle through the mortal realms to achieve your ultimate goal: a more lucrative retirement.
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt. 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.