Shares in aerospace engineering company Meggitt (LSE: MGGT) have surged by over 5% today after the company released an upbeat set of first half results. In fact, pretax profit rose from £98m in the first half of 2014 to £115m in the first half of 2015, with a strong performance from its civil aerospace and military divisions helping to push sales upwards. And, while the energy division performed weaker than expected, the company’s total revenue was an impressive 10% higher than in the previous year’s first half.
Furthermore, Meggitt has won two contracts, with the first being a deal worth around £27m with US peer, Lockheed Martin, while the second is a contract with the Ministry of Defence that is worth around £10m.
Looking ahead, Meggitt is expected to deliver solid earnings growth over the medium term, with its bottom line forecast to rise by 5% this year and by a further 8% next year. And, while that is only in-line with the growth rate of the wider index, it compares very favourably to the anticipated performance of other defence and industrial stocks which are presently enduring a challenging period.
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For example, industrial peer GKN (LSE: GKN) is expected to see its earnings fall by 11% this year. As such, Meggitt may benefit from improving investor sentiment to a greater extent than GKN in the short run, even though its price to earnings (P/E) ratio is higher at 14.3 versus 12.3 for GKN.
However, looking to 2016, GKN is forecast to turn its performance around and, like Meggitt, should benefit from an improving outlook for the global economy. In fact, GKN is expected to grow its net profit by as much as 10% in 2016, which is likely to turn around the share price fall of 5% that has been experienced in 2015. And, with GKN trading on a price to earnings growth (PEG) ratio of 1.1, versus 1.4 for Meggitt, it appears to offer growth at a more reasonable price.
Of course, defensive stocks such as National Grid (LSE: NG) also have considerable appeal and, unlike cyclical stocks such as Meggitt, can become more popular during uncertain periods. And, while National Grid may be expected to see only a rise in its earnings of 3% in the next two years, its P/E ratio of 14.5 still holds huge appeal and could benefit from an upward rerating over the medium to long term. That’s especially the case since interest rates are set to rise at a slow pace and are unlikely to significantly weaken investor sentiment in highly indebted stocks such as National Grid in 2016 and beyond.
Furthermore, and unlike GKN and Meggitt, National Grid offers a very generous dividend, with its shares currently yielding 5.2% versus 3.1% for Meggitt and 2.8% for GKN. As such, a pairing of National Grid and GKN appears to be a sensible way forward for long term investors. That’s because the two companies, when combined, offer strong growth potential, appealing valuations and impressive yields. And, while Meggitt is a top quality stock with a bright outlook, Foolish portfolios may benefit to a greater degree from holding GKN and National Grid over the long run.
