Meggitt is too cheap to ignore, says Barclays

Aerospace and defence engineer Meggitt rallied after Barclays reiterated its ‘overweight’ rating on the shares, saying the stock was “too cheap to ignore”.

Meggitt’s shares plunged last week after warning that full-year profits will miss its £369m forecast, due to fewer contracts and increasing programme deferrals.

“Rarely do we find A&D companies which are simply too cheap, but post last week’s warning Meggitt is firmly in that bracket,” Barclays analysts Phil Buller and James Zaremba wrote in a note to investors on Tuesday.

“At 10x FY16 P/E, 9x EV/EBITA with a comfortably affordable dividend yielding circa 4.5%, the shares trade at a 25% discount to their own historical averages vs. the sector in spite of a 6% EPS CAGR and unmatched cash progression.”

The analysts added they were concerned about the near-term visibility and capital deployment discipline but it seemed more than in the price.

They lowered Meggitt’s price target to 420p from 610p.

“In short, we see this as a compelling entry point with limited further downside. 420p price target implies 19% upside.”

Barclays said two thirds of the recent profit warning was “volume/timing driven rather than that of adverse mix, a positive in our mind”.

The broker was anticipating a slight increase in inventories which would be offset by receivables.