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Why did the Meggitt share price surge last week?

Image: Rolls-Royce

2020 was a tough year for the Meggitt (LSE:MGGT) share price. As the aerospace sector ground to a halt, the engineering group saw its stock plummet by nearly 60% in the early months of the pandemic. And within six months, its underlying profits were slashed by 37%.

As the vaccine rollout continued, along with new contracts being signed, the company started recovering. But last week it jumped by 14% in a day. What caused this sudden growth? And should I be adding this stock to my portfolio?

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The surge in the Meggitt share price

Such a substantial rise in a share price is usually attributed to an excellent earnings report or a rumoured takeover. In the case of Meggitt, it appears to have been driven by the latter, a potential buyout. Last week, a report published by Dealreporter indicated that US company Woodward Inc is looking to make an acquisition offer.

An acquisition or merger is plausible but as it stands, it remains only a rumour. Meggitt’s management team has so far refused to comment. But if it turns out to be true, then the company will have to inform its shareholders relatively soon.

Despite the most recent gain and steady recovery over the last 12 months, the Meggitt share price is still firmly below pre-pandemic levels. But it has increased by more than 90% over this time period. Assuming that an offer is made, it’s likely that the stock will surge once again to meet the proposed price, whatever that may be. However, if the rumours prove to be just rumours, then I think it’s likely to see some short-term decline as traders lose interest.

A company worth owning?

Ignoring the possibility of a buyout, is Meggitt a company I would want to own a part of as a long-term investment? Looking at its full-year 2020 results, revenue and underlying profits fell by 22% and 53%, respectively. This is obviously not a good sign. However, upon closer inspection, there are reasons to be optimistic.

The majority of this impact originated from reducing aircraft parts orders in the firm’s civil aerospace division. This is not surprising, given that travel restrictions have kept most planes on the ground. But the vaccine rollout is progressing relatively quickly both here in the UK and in the US. Therefore the order book may soon begin to recover, especially since domestic and short-haul flights are already back on the rise. 

Meanwhile, the firm’s Defence segment actually achieved some growth thanks to the US government ramping up defence spending. And while its Energy segment did suffer some disruptions due to volatile oil prices, its projects were merely delayed and not cancelled. It means this revenue has not been permanently lost. In other words, it looks like the Meggitt share price may be able to fully recover to pre-pandemic levels this year. 

The Meggitt share price has its risks

The bottom line

As exciting as a potential buyout is, it’s a poor reason to invest in my experience. But looking at the underlying business, Meggitt appears to be on the road to recovery. And the senior managers seems to agree, as they expect underlying profits to return to growth later this year.

With a seemingly healthy balance sheet and a clear path to recovery, I would consider adding Meggitt to my portfolio as a long-term investment.

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Zaven Boyrazian does not own shares in Meggitt. 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.

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