Wednesday tips round-up: BP, Meggitt

What kind of investor would buy a stock whose total return over the last ten years was -4% and has underperformed its benchmark by 90 percentage points during that same period? Institutional investors to name but one. What company are we talking about? BP. Buyers continue to be attracted by the company’s dividend - the yield on the shares now stands at 6% - and its free float. For all intents and purposes, the stock is hard-wired into the pension investments of many a Briton.

Yes, the outfit was the victim of an unfortunate disaster in the Gulf of Mexico. No, it does not rely on the cash generated by its stake in Russia’s Rosneft. Even so, it does not merit to be considered a “core” holding. Current levels of capital expenditure will come under pressure from oil at $50 per barrel. Even a sale to the likes of Exxon is far easier said than done, given present levels of volatility. In the best of worlds, one can describe it as a risky turn-around-story. “Permanence is overrated,” says the Financial Times’ Lex column.

Meggitt managed to navigate deftly through the wreckage and debris of the past financial crisis. The company refinanced its debt while simultaneously lessening its dependence on Airbus and Boeing’s commercial aircraft programmes through targeted acquisitions. Ironically enough, the current dearth of properly priced potential acquisition targets means the engineer prefers to return excess cash-flow to its shareholders. In fact, the firm believes its current level of borrowings is not high enough given the current low interest rates. Significantly, the outfit’s latest trading statement revealed strong growth in the supply of original equipment to the two aircraft-makers mentioned above.

The maker of sub-systems for the aerospace, defence and energy markets also saw a similar return to growth at its defence arm. Furthermore, and despite the problems on its energy side, in Brazil, linked to its local partner which supplies to state oil company Petrobras, that division offers good diversification overall. The stock is a long-term buy and will enjoy the support of a share buy buyback programme that is expected to stretch to up to £270m. “Buy long-term,” says The Times’s Tempus.