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FTSE 350 Outlook: Engineering & Diversified Industrials

Created:
21 January 2008
Written by:
Stephen Gunnion

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.

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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.

Company name Price (p) Mkt val. (£m) P/E ratio Div. yld (%) 12M price chng.(%) Last IC view
AGA FOODSERVICE 334.5 385.42 11.1 3.26 -20.54 Fairly priced, 439p, 19 Oct 2007
BODYCOTE INTL. 165.5 532.33 8.6 4.38 -26.44 Buy, 244p, 30 Nov 2007
CHARTER 647.5 1079.38 8.4 0 -22.59 Buy, 941p, 15 Nov 2007
COOKSON GROUP 529.5 1125.52 10.5 2.12 -14.46 Good value, 874p, 15 Oct 2007
ENODIS 141 517.82 11.8 3.12 -30.54 Good value, 181p, 21 Nov 2007
FKI 51.25 301.51 5.2 8.78 -51.88 Sell, 68p, 11 Dec 2007
FOSECO 283.5 471.93 20.1 1.81 47.27 Sit tight, 286p, 15 Oct 2007
IMI 346.5 1117 8.5 5.54 -30.91 Good value, 571p, 3 Sep 2007
ROTORK 819 708.2 20.4 2.36 1.36 Fairly priced, 969p, 31 Jul 2007
SEVERFIELD-ROWEN 398 352.66 13.7 4.02 -5.24 Good value, 511p, 10 Dec 2007
SMITHS GROUP 1031 3997.77 21.9 3.33 -8.72 Buy, 1,094p, 26 Sep 2007
SPIRAX-SARCO 864 657.53 14.2 3.16 -7.89 Fairly priced, 1,010p, 6 Sep 2007
TOMKINS 160 1410.04 7.7 8.68 -36.25 Sell, 246p, 6 Aug 2007
WEIR GROUP 719 1504.75 19.7 2.07 31.2 Good value, 757p, 5 Dec 2007

MORE FTSE 350 OUTLOOK SECTORS

See also:

Aerospace & defence

Housebuilding & construction

Chemicals

Mining

Oil & gas

Forestry and paper

For a full table of contents for the FTSE 350 Outlook series, click here.

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