Meggitt downgraded as shares look expensive

JP Morgan Cazenove has downgraded Meggitt from ‘neutral’ to ‘underweight’ as the company looked too expensive.

On Tuesday, the FTSE 250 aerospace and defence firm posted a small rise in 2015 pre-tax profit and lifted its dividend despite what it referred to as a challenging year.

For the year ended 31 December, it said statutory pre-tax profit nudged up 1% to £210.2m from £208.9m in 2014, as revenue grew 6% to £1.65bn.

JP Morgan Cazenove noted on Wednesday that the shares rallied 24% since October with no material change in the earnings outlook.

“This leaves MGGT looking expensive in our view and we downgrade the shares to Underweight,” it said.

“MGGT only expects to deliver low single digit growth in 2016, with no improvement in its EBITA margins.

However, it said the rating is relative to other aerospace and defence stocks where it saw share price upside potential of over 15% by December 2016 including BAE Systems and Cobham.

It followed the investment bank upgrading Rolls-Royce to ‘neutral’ from ‘underweight’ on Thursday, even though it said it looks more expensive than Meggitt.

However, JP Morgan Cazenove said there are some important differences in the equity stories, including Rolls-Royce’s Civil Aerospace profitability “almost certainly” at a cyclical low, whereas it believed it may not be the case for Meggitt.

It also believed many investors appear willing to value Rolls-Royce on earnings potential at the end of the decade.

Shares in Meggitt were down 16.9p (3.94%) to 411.8p at 0937 GMT.