LONDON -- Happy days for loyal investors in FTSE 100-listed global engineering group GKN (GKN), whose share price is up 144% in the past three years, against 28% for the index as a whole. But that follows some tough times, with GKN banking losses in 2008 and 2009, before bouncing back with a vengeance in 2010. How does the future look now? And should I buy it?
GKN is divided into four divisions covering motor, metals, aerospace and land systems. This diversification has helped it survive variable market conditions, with growth in commercial aerospace offsetting weakness in construction and European industrial markets, which hit its land systems division.
Global diversification also helped, with strong light-vehicle production growth in China (10%) and Brazil (11%) balancing sharp drops in Japan (-16%) Europe (-9%) and India (-6%). Recent figures were patchy. Year-on-year Q1 sales rose 9% to £1.89 billion, although they were organically flat, while profit before tax fell 4% to £119 million. Trading profit also fell by 1% to £139 million.
Aero dynamic
The market was forgiving, because the figures were knocked by company restructuring, which is now largely complete. GKN management still expects 2013 "to be a year of good progress". Last year's acquisition of Volvo Aero, now renamed GKN Aerospace Engine Systems, has been well integrated into the company, although it did push up net debt from £538 million in 2011 to £940 million. Management remains confident (isn't it always?) and expects benefits to flow from its "market leadership positions, advanced technology and extensive global footprint".
At £2.98, GKN is just 14 pence off its 52-week high. Investors are banking on further growth in China, as its motoring arm GKN Driveline pursues plans for a new forging plant in Wuhan. Let's hope China delivers. With both Airbus and Boeing increasing production, the outlook for commercial aerospace looks promising, and should offset the slide in military budgets. But Europe will continue to weigh heavily, what happens in Japan is anybody's guess, and construction is still in the doldrums.
A better bet
The wider uncertainties are reflected in the price, with GKN trading at 11.4 times earnings against 13.3 for the FTSE 100 as a whole. Yet it yields a relatively lowly 2.4%, against the index average of 3.4%. With 3.7 times cover, could GKN be more generous? Forecasts suggest earnings-per-share growth will be flat in the year to 31 December, then leap 14% in 2014. Goldman Sachs has just upped its target price from £2.68 to £3.22, which suggests there is some scope for further upside, but it remains neutral on the stock. And right now, so am I.
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