Dwindling military spending in the west sparked a savage de-rating of the defence sector, and Cobham, with its heavy exposure to the Pentagon, still bears the scars. But better than expected results for 2011 indicate that the tide may be turning. What's more, the development of a bullish chart pattern suggests the shares could be fuelled for a rapid recovery.
- Better than expected results
- Success in emerging and commercial markets
- Bullish price chart formation
- Possible bid target
- Over half sales from US
- Exposed to defence cuts
It's already under way. The 2011 figures showed that cost-cutting had increased profit margins at the core business by 1.7 percentage points to 20.8 per cent, firing underlying pre-tax profit 7 per cent higher to £328m. And £75m of cost savings a year in 2014 – £10m more than planned at no extra cost – should beef up margins further. Significantly, the jump in earnings was "the largest 'beat' of any European aerospace and defence stock yet this reporting season", according to analysts at Deutsche Bank.
Chairman John Devaney expects "some underlying progress this year", probably 1-2 per cent in a market with limited visibility. However, that shouldn't deter investors. Glance at the price chart to see why. Cobham's price repeatedly found a floor around 168p last year, a level that also broke its fall in early 2009, points out Investors Chronicle's technical analyst Dominic Picarda. Having built a solid base in this area over some six months, the price has since turned decisively upwards once more. Its 50-day moving average recently crossed above its 200-day moving average, an event known to chartists as a 'golden cross'. The significance of this event is to confirm the new uptrend – and typically to hail fresh gains.
COBHAM (COB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 217p | MARKET VALUE: | £2.34bn | |
| TOUCH: | 216-217p | 12-MONTH HIGH/LOW: | 238p | 163p |
| DIVIDEND YIELD: | 4.1% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 88p | NET DEBT: | 23% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 1.47 | 121 | 8.1 | 4.95 |
| 2009 | 1.88 | 245 | 16.3 | 5.45 |
| 2010 | 1.90 | 189 | 13.3 | 6.00 |
| 2011 | 1.85 | 234 | 16.8 | 8.00 |
| 2012* | 1.75 | 314 | 22.1 | 8.80 |
| % change | -5 | – | – | +10 |
Normal market size: 15,000 Matched bargain trading Beta: 0.9 *Deutsche Bank forecasts (profits and earnings are not comparable with historic figures) | ||||
Concerns about the US, where Cobham generates over half its sales, look priced in too. President Obama's new security priorities "favour Cobham", argues Mr Devaney. Expanding US operations in the Pacific will need its air refuelling systems, satellite navigation and radar antennas. Digitising security services is also big business for the company's surveillance products division, while robots on the ground are hot property.
Moreover, emerging markets, such as Brazil, are becoming more important for Cobham. Non-US defence and security customers now account for 28 per cent of its sales and Cobham has kit on both the Rafale ($165,000) and Typhoon ($1.4m) fighter jets, currently scrapping over a huge deal in India.
Commercial aircraft markets contribute, too. Ramping up production of the Airbus A380 superjumbo ($250,000) and Boeing's 787 Dreamliner (up to $150,000) carrying Cobham antennas and other kit are all to the good.
Mr Devaney is looking "extremely hard" to acquire suppliers with content on the 787, A350 and new fuel efficient A320neo. "There are plenty of targets," he says. A bid for Danish communications equipment company Thrane & Thrane has just been rejected. Strong cash generation could eliminate net debt next year, handing the boss a £700m war chest. Whether he gets a chance to use it is another matter, given persistent takeover rumours.
