The engineering sector ended 2007 on the back foot, after worries about a global slowdown sent share prices reeling. However, with a diverse mix of companies, fortunes for the sector are mixed this year and there are buying opportunities for those who can separate the wheat from the chaff. And with valuations depressed, expect more consolidation of the sector as those companies on the lookout for deals take advantage of bargain basement prices to grow their business.
This year kicked off with Cookson completing its £497m acquisition of Foseco. Cookson is paying a 31 per cent premium to where Foseco's shares were trading before news of the deal broke last year, in order to obtain Foseco's foundry division - which has a leading market position - and a steel business that complements its own. And, apart from cross-selling opportunities, Cookson expects to achieve cost savings of £18m a year. Expect more deals of this nature in the sector. However, while the acquisition is seen as a good one for Cookson, its share price has followed the rest of the engineering sector southwards. Other shares coming under pressure - and offering attractive valuations due to expected strong earnings growth and strong cash flows this year - include Charter, Bodycote, Smiths Group and Severfield-Rowen. But watch out for companies with large exposure to vulnerable parts of the US economy like Tomkins, whose North American automotive and hardware businesses are weak, and FKI, which is battling to finalise a restructuring due to a pullback at handling systems business, FKI Logistex.
While cyclical industrial stocks such as engineers will suffer in general in a period of slower growth, many UK engineers are exposed to late cycle markets like shipbuilding, power, oil and gas. And many are enjoying strong end-market demand from these markets. So, while these companies are likely to do well in the short-to-medium-term, those exposed to the housebuilding, automotive and retail sectors aren't likely to fare as well. In the short term though, don't be surprised if worries about the global economy continue to drive share price sentiment.
