Is FTSE 100 Stalwart Meggitt a Good Value?

Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:

• growth in earnings
• an upwards P/E rerating

Highly successful fund manager Peter Lynch classified steady growers as Stalwarts, which he typically traded for 20%-50% share price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.

Seeking durable growth
Not all companies achieve stable growth, as you can see by the aggregate performance of those in London's premier FTSE 100 index (UKX), where the compound annual earnings growth rate has been just 0.7% over the last five years:

Consistent, cash-flow-backed growth in profits is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.

One contender is Meggitt (LSE: MGGT.L), which provides systems and electronics for the aerospace and defense industries. This table summarizes the company's recent financial record:

So, earnings have grown at an equivalent 9.6% compound annual growth rate, putting the company in the "Stalwart" category.

Meggitt describes itself as a global engineering group specializing in extreme environment components and smart sub-systems for aerospace, defense, and energy markets. It employs around 10,000 people worldwide to produce things like control, sensing, aircraft breaking systems, and polymers and components.

Civil aerospace accounts for 46% of revenues, military 40%, and other markets 14%. Its most important territory of operations is the U.S., which delivers around 56% of revenues, followed by its "rest of Europe" category with 22%, the rest of the world at 13%, and 9% from the U.K.

As well as earnings from new installations, the company enjoys a cash-generative maintenance and spares business too. With more than 57,000 aircraft installations worldwide, there is what the company calls a "stable aftermarket stream stretching out for many years."

If Meggitt can keep winning new business as well, the prospects for rising earnings look promising.

Meggitt's earnings growth and value score

I analyze five indicators to determine whether earnings growth can continue and if the shares offer good value:

1. Growth: revenue, earnings and cash flow all growing steadily (5/5)
2. Level of debt: net debt is around 3.5 times annual underlying profits (2/5)
3. Outlook and current trading: good recent trading and a cautiously positive outlook (4/5)
4. Enterprise value to free cash flow: above historic growth rates at about 14 (2/5)
5. Price to earnings: at around 12, slightly above historic growth rates (2/5)

Overall, I score Meggitt 15 out of 25, which encourages me to believe this stalwart can continue earnings growth that outpaces that of the wider FTSE 100. The company seems to have a full price when compared to the FTSE's price to earnings ratio of around 11 and the firm's growth predictions.

Foolish summary
Although there is a big chunk of debt, Meggitt manages interest payments easily from its strong cash flows. It's encouraging to see good recent trading and a positive outlook.

Right now, forecast earnings growth is 9% for 2013, and the forward P/E ratio is 10.6 with the shares at 403 pence. Considering that and the other factors analyzed in this article, I think that the firm can stay on watch, for now.

Meggitt is one of several stalwarts with steady growing earnings on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.

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