Shares in defence-focused technology group Cohort (LSE: CHRT) have climbed nearly 5% this morning, after the firm announced a £13.3m acquisition.
Cohort’s latest purchase is of a Portuguese firm, Empresa de Investigação e Desenvolvimento de Electrónica, S.A. (EID), which specialises in communications systems for the global defence market.
The acquisition will be part-funded from Cohort’s £19m cash pile and from a new debt facility. EID generated revenue of €14.5m last year, with an operating profit of €1.4m. The firm has a backlog of orders worth €35.2m, with €12.4m of revenue already on order in 2015.
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These figures imply that EID has an operating margin of around 10%, which is in line with the 10% adjusted operating margin reported by Cohort in 2014. Given that EID has €3m net cash and no debt, this looks an attractive deal, in my view, and should help Cohort to maintain its impressive growth.
EID has customer relationships in a wide range of export markets. It seems reasonable to expect that Cohort’s other operating companies may also be able to utilise these relationships to generate additional new growth.
Is Cohort still a buy?
Shares in Cohort have risen by 50% so far this year and by 310% over the last five years. Are they still a buy, or has the price got ahead of events?
Trading on a 2015 forecast P/E of 15.7, Cohort does not seem especially expensive.
I’d expect today’s acquisition to add around 10% to earnings per share in 2016, suggesting that the firm’s 2016 forecast P/E might fall as low as 13.3. That seems very reasonable.
Cohort also offers a prospective yield of around 1.8%, which is worth having, and demonstrates the firm’s ability to generate cash. It’s worth noting that the dividend has grown at an average rate of almost 20% per year since 2010.
I also like Cohort’s focus on electronics, software and consultancy. These are areas I suspect may be less vulnerable to cuts than traditional defence hardware like weapons and vehicles.
However, Cohort is a small firm with a relatively short history. Are investors better off sticking with defence heavyweights such as Meggitt (LSE: MGGT) and Cobham (LSE: COB)?
A tough choice
Here’s how Cobham, Meggitt and Cohort compare, based on current forecasts:
|
2015 forecast P/E |
2015 forecast yield |
|
|
Meggitt |
13.9 |
3.0% |
|
Cobham |
12.3 |
4.4% |
|
Cohort |
15.5 |
1.8% |
At first glance, Cobham’s higher yield may look attractive, but I’m concerned by the group’s finances.
Cobham made several acquisitions last year, which caused net debt to triple from £453m to £1,223m and interest cover to fall to just 2.0, the minimum I consider acceptable.
In my view, it may be worth waiting to see how strongly Cobham’s acquisitions contribute to its profits this year, before considering an investment.
Meggitt’s balance sheet looks much stronger. I’m also attracted to Meggitt’s higher profit margins — the firm’s underlying operating margin for the first half of this year was 20%. I’d choose Meggitt rather than Cobham as an income buy, due to its stronger finances.
However, I’d pick Cohort for growth. Earnings per share have risen by an average of 20% per year since 2010, and I think Cohort’s current valuation looks pretty reasonable.
Cohort is growing through acquisition, but has maintained a strong balance sheet with little debt. Further gains seem likely, in my view.
