This article was originally published on Opto – Understand What Really Moves Markets.
In the last three months of the year, the stock climbed over 73%, fuelled by hopes that a vaccine rollout will see demand return in the commercial aviation sector. This uptick saw Meggitt’s share price easily outpace the overall FTSE 350 benchmark, which was up 18% in the same period.
Still, the engineering specialist has seen plenty of turbulence in recent months. In November, Meggitt warned that full-year profits would be down over 50% compared to the previous year, as a lack of demand for airline parts dragged on earnings. Adding to the misery is a resurgence in the coronavirus, which saw Meggitt’s share price drop 7.6% in the first two days of trading this year.
Yet for bargain hunters, this could represent a buying opportunity, with the stock still potentially undervalued.
What happened in Meggitt’s most recent earnings?
Meggitt’s third quarter results, released in November, saw revenue come in at £384m, down 25% from the same period last year. The drop in demand for airline parts dragged on earnings, with Meggitt’s civil aerospace sales down 49% compared to the same period last year — no big surprise considering the wider airline industry’s woes.
On a positive note, its defence division enjoyed a strong performance, boasting organic growth of 9% in the third quarter. Meggitt stated that it had seen “good order flow” and expected this part of the business to perform well for the remainder of 2020.
For the full year, Meggitt said it expects group underlying operating profit to come in between £180m and £200m.
“While we remain alive to the challenges which COVID-19 continues to pose, we are encouraged by recent news on vaccine development and the positive implications for air travel,” said Meggitt’s CEO Tony Wood in November.
Is Meggitt’s share price undervalued?
Considering Meggitt’s share price recently, investors may be wondering whether there is any upside left. According to Simply Wall Street, investors still had the opportunity to “buy low” as of last month.
“Meggitt is still trading at a fairly cheap price. [Simply Wall Street‘s] valuation model shows that the intrinsic value for the stock is £6.00, which is above what the market is valuing the company at the moment,” the publication wrote on 11 December.
Since then, Meggitt’s share price has crept up to 469.8p (as of 6 January’s close) and, if Simply Wall Street’s analysis still holds true, there could be value left in the stock. The investment website also points out that the stock is volatile — it has a beta of 1.55 — so there may be opportunities to buy further dips in Meggitt’s share price.
That said, Simply Wall Street identifies two risks investors should be aware of when it comes to investing in Meggitt. This first is that the company’s debt to equity ratio has increased from 39.1% to 49.8% over the past five years. The second is that earnings do not cover interest payments on debt.
Where next for Meggitt’s share price?
Shareholders will be looking for Meggitt to grow its earnings when it reports full year numbers later this month to allay concerns over debt levels. A continuation of growth in its defence spending will also help build investor confidence. Obviously, a swift return to the skies for the airline industry could also go some way to helping Meggitt’s share price.
Among the analysts tracking the stock on the Financial Times, the stock carries a 422.50p price target, which would see an 11.2% downside on the current price (as of 6 January’s close). The most bullish price target is 525p, which would see a decent 11.7% upside on the current share price.
Meggitt has been the second strongest performer in CMC’s RRG UK Momentum+ Signature Share Basket over the last three months. The basket tracks early-stage, positive momentum in FTSE 350 stocks.
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