At the end of June, analysts at Panmure Gordon warned of a "summer slowdown" and tough times ahead for Britain's manufacturers. In the two months since, the UK industrial engineering sector has tumbled as much as 18 per cent and the latest European industrial data shows eurozone output contracting, one of the key drivers behind the research. But analyst Oliver Wynne-James has crunched the numbers and come up with share price levels that potentially discount the impact of a secondary dip.
Eurozone manufacturing shrank in August for the first time in nearly two years, raising the prospect of economic stagnation during the second quarter, and German investor confidence has plummeted quicker than at any time since Lehman Brothers' collapse in 2008. That makes uncomfortable reading, and it's difficult to predict with any certainty where the global economy will be in six months time.
Still, Panmure has crunched its numbers again to predict another potential decline and calculated new margins based on track records. The broker stressed the work is purely theoretical - there have currently been no changes to either estimates or target prices - and that macro events such as a third wave of US quantitative easing or a freezing up of credit markets could seriously threaten its findings. Still, new revenue and margin scenarios offer potential 'fair values' for discounting the dip and the results make interesting reading.
Mr Wynne-James reckons a slide back into recession is already factored into the price of companies such as
We agree with Panmure that a return to the rock-bottom margins seen in 2009 is unlikely. But the broker warns that "buyers in today's markets may seek further discounts in order to compensate for visibility risk". How much of a discount this will turn out to be remains to be seen and is something to bear in mind when trying to pick an entry point into this highly cyclical sector. But any further sell-off will create bargains.