Meggitt is too cheap to ignore, says Barclays

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.