Should You Buy Meggitt?

LONDON -- Defence specialist Meggitt  (LSE: MGGT  ) has seen its share price rocket since the start of 2013, recently hitting record highs above 490p and surging more than 28% in the year to date.

Yet I believe the stock price still has legs and that, despite recent rapid gains, the prospect of accelerating earnings growth over the medium to long term means that Meggitt still provides decent value for money at current levels.

Soaring 2012 results paint rosy outlook
Meggitt's full-year results released last week showed turnover leap 10% in 2012 to £1.6 billion, which in turn drove underlying pre-tax profits 12% higher to £363 million. Organic sales growth came in at 6%, and the firm expects organic growth of between 6% and 7% per year on average over the next five years.

The company's Civil Aerospace and Military divisions both reported 7% revenue growth last year, to £715 million and £625 million respectively. But the Energy arm was the standout performer, where sales jumped 45% year-on-year to £164 million.

Analysts estimate that revenues from the Energy division could more than double to represent 20% of the group's total within five years. And I believe that galloping orders for commercial aircraft should also continue to thrust demand for the Civil Aerospace operation over the medium to long term, and offset any weakness in the Military division owing to budgetary pressure in the US.

Meggitt announced at the time of its results a $175 million contract with CFM International -- a joint venture between General Electric and Snecma -- to provide thermal-management products for its LEAP engine variants.

The engines, for which Meggitt already provides sensor systems, will power the Airbus A320neo, Boeing 737MAX and COMAC C919 civilian-aircraft fleets.

Earnings predicted to fly higher
City brokers expect earnings per share to clock in at 37p this year, a 3% rise. This figure is then anticipated to accelerate 9% in 2014 to 40p per share.

Meggitt currently trades on a P/E ratio of 12.9 for 2013, and which is forecast to fall to 11.9 next year.

Meggitt also offers investors a sweet dividend yield to enhance the investment case, albeit below the FTSE 100 average of 3.5% -- yields of 2.6% and 2.9% are pencilled in for 2013 and 2014 respectively, and I believe that further lucrative payouts can be expected as earnings balloon.

The company plans to maintain a progressive dividend policy, and a payout of 11.8p per share last year is expected to rise to 12.6p this year and 13.7p per share during the following twelve-month period. These payments are also well protected, with coverage of 2.9 times for both of the next two years.

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