This week has seen many popular stocks take a tumble as coronavirus fears have escalated. The companies I’m looking at today have both fallen by around 15% over the last month.
Both are well-respected engineering companies with strong track records. For this reason, I’m starting to think that the current weakness could be a buying opportunity, despite the risk that markets still have further to fall.
Headwinds
FTSE 250 firm Meggitt (LSE: MGGT) makes sensors and braking systems for jet airliners. These products account for more than half the group’s revenue and enjoy a big market share. According to the company, its products are installed on about 73,000 aircraft today.
Any slowdown in this business could be bad news. Unfortunately that’s what happened last year when the Boeing 737 MAX was grounded. The US manufacturer subsequently slowed and then suspended production of this aircraft.
This has caused a lot of pain for many of Boeing’s suppliers. Meggitt is in a relatively strong position as it’s also a supplier to rival aeroplane manufacturers Airbus, Embraer and Bombardier. Outside civil aerospace, Meggitt also has a sizeable defence business, providing further diversification.
Ready for lift-off?
In its annual results today, Meggitt said that revenue rose by 9% to £2,276.2m in 2019, while pre-tax profit climbed 11% to £370.3m. It’s a respectable performance, but the shares are still down by nearly 5% today.
I think the main reason for this is management’s warning that performance in 2020 will be influenced by the “uncertain timing relating to the return to service of the 737 MAX”. The coronavirus outbreak may also be a factor too, if it affects global air traffic growth.
However, none of this is a surprise. Meggitt shares have already fallen by about 15% from their January peak of 700p. At about 565p (last seen), I think the stock is starting to offer much better value for long-term buyers.
Meggitt’s finances look healthy enough to me. Cash generation is fairly good. The stock now trades on about 15 times forecast earnings, with a dividend yield of 3.3%. Although further falls are possible, I would consider buying at this level.
Down 15% today
Even before the coronavirus outbreak hit the headlines, new car sales were falling in many countries. This situation has now got a whole lot worse. Recent trade press reports I’ve seen suggest that car sales fell by 92% in China during the first half of February. Nearby markets are suffering too.
Falling new car sales are not good news for £400m engineering group Ricardo (LSE: RCDO), which makes high-tech parts for many car manufacturers. The company said today that it expects to see automotive orders fall in the US, EMEA and China regions.
Wider disruption to the firm’s operations in China is also causing problems. Management now expect profits for the year ending 30 June to be significantly lower than previously expected.
It’s not good news, and the shares are down by 15% as I write. But Ricardo also operates in other sectors, such as defence and renewable energy, where demand remains strong.
I’m impressed by this firm’s long track record and expect its performance to recover. With the shares now trading on just 12 times 2021 forecast earnings and offering a yield of about 3.6%, I think Ricardo could make sense as a long-term buy.
