Concerns over aerospace pricing pressures, tepid demand for agricultural equipment, weaker growth in China and the implications of GKN's (GKN) dependence on Volkswagen car sales have weighed heavily on the engineer's shares in recent months. With that tricky backdrop in mind, a confident trading statement outlining organic sales growth of 2 per cent pleased markets enough to propel the shares up 3 per cent.
Unsurprisingly, the group's automotive unit was responsible for most of this growth. Organic sales outpaced global industry production rates by 3 percentage points, despite ongoing difficulties in recession-ridden Brazil and worrying signs emerging from China.
Organic sales were also up slightly in aerospace. True, Airbus's (Fr:AIR) decision to cut wide-body A330 planes, coupled with Boeing's (US:BA) C-17 military transport production coming to an end, were a blow. But these issues were offset by a ramp-up of new aircraft yielding good commercial sales.
Group operating margins were hit by falling sales and restructuring expenses designed to reduce the fixed cost base of GKN's struggling land systems division. Management warned that demand for agricultural equipment remains weak, but is confident that the other divisions can spark growth in 2015.
Canaccord Genuity says...
Buy. GKN has issued a very solid trading update, in which organic sales growth in the first nine months of the year increased by 2 per cent. This is despite a patchy third quarter in Chinese auto and the continued declines in military aerospace sales. The performance underpins why we believe GKN should be a core holding. Its global reach and market-leading positions enable it to outperform its end markets. As the civil/military transition completes, we will see some aerospace growth in 2016 and more in 2017 backed by airframers' substantial visibility.
Numis Securities says...
Add. The investment cycle is weak, with GKN Land Systems' organic sales down 7 per cent, whereas the consumer cycle remains positive - GKN Driveline organic sales are up 4 per cent. GKN has significantly more exposure to the positive consumer cycle - even if areas such as China raise some concerns - which should ensure a favourable backdrop for the group. The outlook is for a slightly weaker fourth quarter, but as forecasts have already been cut this is currently in line with lower expectations. With the shares trading on a PE ratio of 10 times - 11 times including the pension finance charges - the shares are attractive.
