GKN sell-off overdone

A key contributor to the recent sell-off was management's prediction of flat organic aerospace sales in 2016. With emerging market economies no longer expanding at astronomical rates, and the low oil price curbing demand for the latest range of fuel-efficient aircraft, the rate at which key clients Airbus and Boeing are doling out orders has slowed. Given how profitable GKN's aerospace arm is (it accounted for 32 per cent of last year's sales, but 41 per cent of trading profits), investors duly panicked.

We'd argue that the reaction was overdone, particularly as the outlook beyond this year is encouraging. Not only is defence spending improving - GKN's technology features on projects such as Lockheed's F35 fighter jet, but it also secured strong positions on the Airbus A350 and Boeing 737MAX.

With significant projects in the bag and plenty of benefits expected from the landmark acquisition of Fokker last October, the group appears well positioned to continue growing faster than the rest of the market.

While the €706m (£499m) deal to bring Netherlands-based Fokker on board increased debt, which sits alongside a £1.6bn pension deficit, it also left GKN in an even stronger position to supply the world's newest aircraft programmes. Following the acquisition, the group became the third-biggest provider of electrical wiring systems, and the second largest global supplier of lightweight aerostructures. As there's legislation in place requiring companies to cut greenhouse gas emissions, specialising in lightweight technology looks a sure fire way to gain an advantage over competitors.

Meanwhile, management has asserted its confidence in the booming automotive business (its driveline and metallurgy divisions), which last year accounted for 59 per cent of sales and 56 per cent of profit, and expects the division to once again outpace the wider market in 2016. That news should have been well received, but judging by the plunging share price, it wasn't.

The slowdown in China is largely to blame for the gloomy sentiment, a fear that's been escalated by a number of warnings from big European car manufacturers. The People's Republic is a key region for vehicle sales, and among the most profitable areas of business for GKN's driveline and powder metallurgy segments.

But management's confidence may have good foundations, not least based on news that after a lull in February the Chinese automotive market achieved record monthly sales in March and growth of 8.8 per cent. There are several structural reasons to think GKN will continue to prosper in China, too. The soaring popularity of four-wheel drives and sport utility vehicles should also benefit GKN, which is at the forefront of making these vehicles, and also generates more profit from them as they generally require more kit.

And when gas-guzzling motors become a bigger political issue in a nation dogged with pollution problems, GKN's technology used to power electric and hybrid vehicles will be ready to step in. Management has made a big deal of investing in the inevitable switch to greener cars, which leaves it ideally placed to prosper when gasoline-powered engines eventually get phased out. Over in Europe that's already become a priority, with regulations demanding more fuel efficiency by making cars lighter. GKN is once again at the forefront of this change, thanks to its market-leading, lightweight drivetrains.

The outlook for the group's smaller land systems business, which accounts for about 8 per cent of revenues, is less convincing. Plummeting appetite for agricultural and construction products has weighed heavily on this division, forcing management to restructure its operations.