Take a Look at Meggitt

British aerospace and defense manufacturer has potential

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Aug 17, 2016
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Meggitt PLC (

MEGGF, Financial) (MEGGY, Financial) is a British aerospace and defense manufacturer. The stock is held by several value funds and yields 3.15%. It is not followed too closely in the U.S. but is worth looking at.

There are 775.28 million shares, and the company trades at a market cap of 3.547 billion pounds ($4.59 billion in U.S. currency). The dividend is 14.4 pence, and the dividend yield is 3.15%. Earnings per share were 23.2 pence, and the price-earnings (P/E) ratio was 19.7.

The Controls division accounts for 24.2% of sales, Aircraft Braking 21.4%, Polymers 10.8%, Sensing 28.8% and Equipment 14.8%. Civil aerospace accounts for 49% of its business, military 35% and other 16%. Boeing (

BA, Financial) was Meggitt’s largest customer. What’s interesting is that the majority of sales come from the U.S.; 52% of revenues are derived in the U.S., 9% in the U.K., 22% in Europe and 17% in the rest of the world.

Revenues grew from 1.455 billion pounds in 2011 to 1.647 billion pounds in 2015. Operating margins were 14.4% last year. Return on equity was 8.43% last year. Free cash flow was 199 million pounds, and the free cash flow yield was 5.6%. Revenues and earnings grew from 2011 to 2013, then shrank back to 2011 levels in 2015.

The asset side of the balance sheet shows 145.4 million pounds in cash at the end of 2015, 412.6 million pounds in accounts receivables and 415 million pounds in inventories. The liability side shows 406 million pounds in accounts payables and 1.193 billion pounds in debt. Pretty decent balance sheet.

First half pretax profits fell 60% because of the fall in the British pound. A large portion was due to currency hedges put in place. However, revenues were up 11%.

Activist hedge fund Elliot Investors has amassed a 5.2% stake in Meggitt. That is a pretty good chunk. Elliott may convince management to sell out or break the company up. Other major shareholders include Capital Group (

CGHC, Financial) (American Funds), Blackrock (MNE, Financial), Harris Associates and FPA Funds. Between these five, they own almost 30% of Meggitt. The company could be sold off. At the beginning of the year, shares were less than 3.60 pounds. In early August, shares jumped from 4 pounds to 4.60 pounds on the Elliott news.

After the U.S., Britain is the largest aerospace manufacturer in the world. The country is home to giants Airbus (

AIR, Financial) and Rolls-Royce (RR., Financial). The British military is a big spender on hardware, too. All of these things portend good times for Meggitt, as long as the economy cooperates. It is thought the weak pound and Brexit could be good for British aerospace.

You can see why value managers FPA and Harris hold Meggitt. Valuations are decent and the dividend helps out, too. I do not know if it is a buy at this price though. The stock has had a pretty good run up on the Elliott news. Still, it is barely followed in the U.S. and worth a peek.

Disclosure: We do not own shares in any company mentioned in this article.

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