Is GKN a Buy?

LONDON -- Shares in diversified engineer GKN (LSE: GKN  ) reached a multiyear high of more than 255 pence at the end of last week, maintaining the solid momentum which started before the close of 2012.

Citigroup has upped its price target to 290 pence in recent days, and I'm sure the company's enviable foothold in both the car and commercial aeroplane markets provides ample opportunity for the stock to surge still higher.

Move into the fast lane
GKN's sizable Driveline auto division appears to be in pole position to benefit from an expanding global car market.

Scotiabank said in its January auto market report that total global car and light-truck demand could come in at 64.5 million vehicles in 2013, up 4.2% from 61.9 million units in the previous year. Demand is expected to rise in all regions barring Western Europe, where sales are expected to stagnate, with demand in the developing markets of Asia -- and particularly China -- set to drive worldwide demand. A 6% annual rise in Asian consumption to 25.46 million cars is anticipated.

In addition, GKN predominantly services the luxury car sector, an area that boasts resilient growth due to galloping demand in emerging regions and is generally less susceptible to difficult economic conditions than the rest of the global car market. GKN is also a major player in the aerospace market and is a major supplier to plane-building behemoths Boeing and Airbus. The firm is expanding in this area to hitch on to bubbling civil-plane demand, and it purchased Volvo Aero Engines in October to consolidate its position as a tier-one component provider. GKN's more expansive product range will come in handy in an industry beset by problems across the supply chain.

Bargain hunt
GKN's earnings per share are forecast to resume double-digit growth following the 9% rise to 24.6 pence expected for 2012. A 10% increase is anticipated by City experts for both 2013 and 2014, to 27.2 pence and 30 pence, respectively. Yet these healthy earnings projections are not reflected in the current price. GKN boasts a forward P/E ratio of 9.4, analysts predict, which is set to fall to 8.5 in 2014. This translates to a P/E-to-growth ratio of 0.9 and 0.8 for this year and next, respectively -- which, at less than one, traditionally signals that a share may be undervalued in relation to its near-term prospects.

Reap the dividends
A plump dividend boosts the investment case for GKN, with a projected dividend yield of 3% for 2012 expected to advance to 3.4% and 3.8%, respectively, in 2013 and 2014.

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