The pandemic hit Meggitt’s top and bottom line hard as aerospace spending halted. In fact, Meggitt continues to face a challenging environment that includes supply chain disruptions. So how did the company navigate these headwinds and generate eyewatering returns for its investors?

Closer inspection

A closer look at Meggitt’s share price chart would be perplexing for uninformed investors. Incredibly the share price was up just 0.5% between January and July. Then it exploded nearly 60% on the first trading day of August. Subsequently the share price nudged up less than 0.5% in the remainder of the year. The Meggitt share price found itself in relative limbo for most of the year despite breathtaking share price performance. Indeed, it is still trading sideways at the start of 2022. 

That sudden jump in August sent the FTSE 100 constituent’s share price to an all-time high but what caused this boom?

Recently there have been encouraging signs of a recovery in civil aerospace. The company reported a £48m profit for H1 2021, a big improvement on the £348.7m loss reported for H1 2020. Additionally, in the latest trading report Meggitt reported a 5% year-on-year increase for the third quarter. Nevertheless, this is not the blowout performance that could create such explosive growth in the share price of a company. 

FTSE 100 takeover target

It was an acquisition announcement that sent the FTSE 100 company’s share price skyrocketing. Aerospace and defence competitor Parker-Hannifin reached an agreement to acquire Meggitt in a cash deal worth £6.3bn. That translates to a share price of roughly 800p. This valuation represented a 70% premium on where the company traded a week before. Certainly this provides the context to the volatile chart above.

The acquisition is subject to regulatory clearance but Parker-Hannafin had promised a series of commitments regarding UK jobs and investment. However, the deal has triggered concerns from the UK government. “On 18 October 2021, acting on official advice, the Secretary of State issued a public interest intervention notice to intervene in the proposed transaction on national security grounds”, the government said. The Competition and Markets Authority (CMA) now has until midnight on 18 March 2022 to complete and submit this report to the Secretary of State.

What next?

The FTSE 100 index has a ‘dinosaur’ reputation among some investors. Skewed towards banks and oil stocks, some companies look dated and arguably lacking in real innovation. This cannot be said about Meggitt. The acquisition has already been approved by Meggitt shareholders. Should the deal go through, one of the best FTSE 100 performers of 2021 and a global innovator will soon leave the index. 

This is not surprising as Meggitt’s share price has rocketed by 93% in the last six months and 190% in the last 12 months. What is the reason for this uptrend and are its shares a buy for my portfolio today? Let’s take a closer look.

Reason behind the surge

Meggitt agreed with American engineering manufacturer Parker Hannifin to be bought for £6.3bn. The announcement on 2 August of the cash acquisition worth 800p-per-share caused the steep increase in its share prices. Since then, there has been news of a counter-bid from Parker’s rival, US-based TransDigm Group, with a preliminary offer of 900p per share. This bidding war has catapulted Meggitt’s share price to 831p, although not to the counter-bid level.

That counter-bid remains unsolicited and the Takeover Panel, the UK’s regulatory body that oversees mergers and acquisitions, has said TransDigm has until 5 pm on 14 September to make a firm offer or walk away. This means Parker Hannifin remains the frontrunner at the moment. 

Worries surrounding the deal

The UK government has kept a close watch on the deal as it raises national security concerns over foreign ownership of companies in the defence and aerospace sector. The government is also wary of the impact of this deal on Meggitt’s 2,300 employees in the UK.

Parker Hannifin has already agreed to contractual commitments as part of the deal. That should ensure that Meggitt retains its presence in the UK after the takeover. The commitments include maintaining Meggitt’s labour force here and a 20% increase in the company’s R&D over five years. If the deal materialises, Parker Hannifin will retain the UK headquarters. And it will honour Meggitt’s pre-existing defence deals with the UK government.

Meggitt seems optimistic about the outcome of the deal, both for the company and as far as easing governmental concerns is concerned. It has provided information about the deal before a shareholder vote on 21 September. 

Shareholder concerns

Yet as a potential investor, I feel that the concerns cast a shadow over this deal. As mentioned, the shares currently stand at 831p which is well below the 900p TransDigm bid. Even if Parker Hannifin increases its initial offer to match the rival bid, at Meggitt’s current share price, I feel the risks outweighsany gains on my potential investment.

That’s because, if the deal falls through, I can see the shares sliding back to the pre-takeover news price of 430p. Also, the UK market is subject to an increasing number of bids from overseas businesses. Morrisons is under the takeover spotlight at the moment too. There is too much uncertainty around Meggitt’s shares at the moment for me to consider adding them to my portfolio.

The exploding Meggitt share price

In my experience, seeing a stock surge by double-digits in a single trading day is caused by one of two things. A solid trading update or an acquisition offer. In the case of Meggitt’s share price, it was the latter.

Acquisition rumours have been surrounding this business since May. But on Monday morning, the management team announced it had reached an agreement with Parker-Hannifin for the cash acquisition of the entire company.

The deal is valued at £6.3bn, which translates to a stock price of 800p. Compared to Meggitt’s closing share price of 469p the week before, this offer represents a 70% premium. So, I’m not surprised to see the Meggitt share price explode on the news.

The risks that lie ahead

Today Meggitt is trading at around 717p. That’s about 10% lower than the acquisition price. It seems some investors are selling early due to some uncertainty as to whether this deal will actually go through. And I think they are right to have some concerns.

While I feel shareholders will likely approve the deal, regulators may be harder to persuade. In the UK, all such acquisitions have to be approved by them. However, in the case of Meggitt, things get a bit more complicated. Why? Because the business is heavily involved in the aerospace and defence sector. And thus, national security will be in question.

The UK government has already released a statement saying it’s “closely monitoring” the deal. Should it conclude that this acquisition could compromise national security, it will more than likely block it. And given the Meggitt share price is currently being elevated by the prospect of a buyout, should this decision be made, the share price could quickly crash back down.

What’s next?

There’s no guarantee the UK government will approve the deal. However, Parker-Hannifin is certainly trying to be persuasive. As part of the agreement with the Meggitt management team, legally binding commitments have been put in place. The firm intends to keep all manufacturing jobs and facilities within the UK, maintain current levels of research & development spending, and keep its headquarters in Coventry.

Whether this will be enough, only time will tell. But it certainly improves the odds, in my opinion. Therefore, if I were a shareholder of Meggitt, I would wait to see the verdict before selling any shares below the acquisition price. And as I’m not a shareholder, I won’t be buying as the uncertainty is too high for me.

What’s the deal?

Under the terms of the deal, owners of the stock will receive a round 800p for every share that they own. This would be a 70.5% uplift on the Meggitt share price last Friday. As Mondays go, I can think of worse ways to start a week as an investor!

It’s not hard to see why Parker would be interested in acquiring the FTSE 250 member either. Both already supply defence equipment to the UK and US governments, as well as those in the EU. Snapping up Meggitt would also allow the $47bn giant the opportunity to double its Aerospace Systems segment. 

The latter could be great timing on Parker’s part. Describing the deal as “strategically and culturally compelling”, Meggitt’s potential suitor believes the deal will allow it to take advantage of strong growth opportunities going forward, especially as the world gets back to normal after Covid-19 and commercial aerospace recovers.

Based on its calculations, Parker believes its earnings will increase in the first full year after the deal is done. It’s certainly no stranger to acquiring and successfully integrating UK companies.

This is not to say that Meggitt will be moving across the pond. To allay any fears, Parker has already said that it will keep the components supplier headquartered in the UK and ensure that the majority of Meggitt’s board is made up of UK nationals. R&D spending will also be maintained (and possibly increased) in the years ahead.

Meggitt share price: what now?

Unsurprisingly, Meggitt’s directors have unanimously recommended that shareholders vote to accept the takeover. This is where things get even more interesting.

The Meggitt share price was trading around 730p a pop this morning. That’s up a whopping 55% on last Friday’s closing price. However, it’s still almost 10% below the offer price mentioned in today’s statement.

The question is whether today’s news will bring out another bidder. As Morrisons has shown, it only takes one buyer to show their hand before others arrive on the scene. Then again, a premium of over 70% is already very generous and takes the share price back above pre-Covid levels. Another potential suitor would really need to dig deep.

There is, of course, always a chance the deal might fall through. Holders may reject the offer, thinking they can get more for their company. Should this be the case, I’d expect the share price to become volatile if no one else steps forward. It’s interesting to note that gaming firm Sumo Group‘s valuation has begun to drift since it received an offer from China’s Tencent in mid-July. Then again, this might have something to do with the internet giant hitting the headlines back home!

UK plc on sale!

Regardless of what happens next, today’s announcement is more evidence that the (relatively cheap) UK market is continuing to attract overseas bidders. As such, I don’t think this will be the last big takeover we’ll be hearing about in 2021. Indeed, I suspect FTSE 100 firm Burberry could be one of the next to receive an offer or two unless it takes steps to reassure investors.

As the vaccine rollout continued, along with new contracts being signed, the company started recovering. But last week it jumped by 14% in a day. What caused this sudden growth? And should I be adding this stock to my portfolio?

The surge in the Meggitt share price

Such a substantial rise in a share price is usually attributed to an excellent earnings report or a rumoured takeover. In the case of Meggitt, it appears to have been driven by the latter, a potential buyout. Last week, a report published by Dealreporter indicated that US company Woodward Inc is looking to make an acquisition offer.

An acquisition or merger is plausible but as it stands, it remains only a rumour. Meggitt’s management team has so far refused to comment. But if it turns out to be true, then the company will have to inform its shareholders relatively soon.

Despite the most recent gain and steady recovery over the last 12 months, the Meggitt share price is still firmly below pre-pandemic levels. But it has increased by more than 90% over this time period. Assuming that an offer is made, it’s likely that the stock will surge once again to meet the proposed price, whatever that may be. However, if the rumours prove to be just rumours, then I think it’s likely to see some short-term decline as traders lose interest.

A company worth owning?

Ignoring the possibility of a buyout, is Meggitt a company I would want to own a part of as a long-term investment? Looking at its full-year 2020 results, revenue and underlying profits fell by 22% and 53%, respectively. This is obviously not a good sign. However, upon closer inspection, there are reasons to be optimistic.

The majority of this impact originated from reducing aircraft parts orders in the firm’s civil aerospace division. This is not surprising, given that travel restrictions have kept most planes on the ground. But the vaccine rollout is progressing relatively quickly both here in the UK and in the US. Therefore the order book may soon begin to recover, especially since domestic and short-haul flights are already back on the rise. 

Meanwhile, the firm’s Defence segment actually achieved some growth thanks to the US government ramping up defence spending. And while its Energy segment did suffer some disruptions due to volatile oil prices, its projects were merely delayed and not cancelled. It means this revenue has not been permanently lost. In other words, it looks like the Meggitt share price may be able to fully recover to pre-pandemic levels this year. 

The bottom line

As exciting as a potential buyout is, it’s a poor reason to invest in my experience. But looking at the underlying business, Meggitt appears to be on the road to recovery. And the senior managers seems to agree, as they expect underlying profits to return to growth later this year.

With a seemingly healthy balance sheet and a clear path to recovery, I would consider adding Meggitt to my portfolio as a long-term investment.

An aerospace firm that isn’t suffering too badly

Meggitt Group is one aerospace firm that isn’t faring too badly in the current economic climate. The impact of the Covid-19 pandemic on the aviation and aerospace industry has been well documented. The Meggitt share price, though, hasn’t fared badly, in my opinion.

Meggitt Group is an engineering firm that operates in three core divisions: civil aerospace, defence, and energy. Over 50% of Meggitt’s revenue comes from its aerospace division. The applications of its products include civil aircraft, helicopters, engines, and business jets. It says that its parts are fitted to “almost every jet airliner, regional aircraft, and business jet in service”. Defence generates over 30% of revenue with applications deriving from military aircraft, vehicle, naval, and space markets.

Despite the well documented, difficult market conditions, Meggitt hasn’t suffered too much. It has been able to avoid running up high levels of debt. Furthermore, it has not had to raise capital by selling shares.

Meggitt share price continues to rise since crash

The share price gain Meggitt experienced at the end of last week was closely linked to takeover rumours. A report emerged from the US that aerospace engineering group Woodward Inc may be considering a deal. Woodward is a £5.7bn market cap firm, compared to £3.6bn Meggitt. There hasn’t been any comment from Meggitt regarding this news though. Today has seen its share price dip nearly 4% as I write.

The Meggitt share price has risen nearly 100% in the past 12 months. As I write, shares are trading for 482p per share. This time last year, I could buy shares for 245p per share. Covid-19 caused most shares to crash badly when the world’s airlines were shut.

In February of 2020, Meggitt’s share price fell from over 600p per share to around 220p. That’s a 65% drop. Reviewing these figures and timeline, Meggitt’s shares are still cheaper than pre-crash levels at current levels.

Buy or avoid?

Meggitt has a good track record of performance with a history of double-digit profit levels and good cash generation. Furthermore, many of its products are essential to modern day aerospace vehicles. As I mentioned earlier, it has not been hit too badly by the market crash and pandemic.

During the pandemic, I avoided buying airline and aviation stocks. Restrictions are now easing and pent-up demand may even assist in a quicker recovery. Aviation body IATA, however, believes flying levels will not return to 2019 levels until approximately 2024.

I am still of the same view and would not want to risk my hard earned money just now. The Meggitt share price is trading on close to 20 times 2022 forecast earnings, which is a bit too expensive for my liking.

I would rather look to make a passive income from FTSE 100 stocks. Here are some I like just now that could boost my portfolio.

I like Meggitt because many of its products are embedded in modern airliners and require repeat purchases. I think the business has a strong future. But after such big gains, have I left it too late to buy? I’ve been taking a fresh look at this situation.

Bid rumours lift stock

It’s common to see the share prices of small companies bounce around for no reason. But it’s unusual for big companies like Meggitt, whose shares are traded in decent volumes each day.

Sure enough, Meggitt’s 14% share price gain this morning has been triggered by those bid rumours. According to a Reuters report, a US website has reported that US aerospace engineering group Woodward Inc may be considering a deal.

Woodward has a market-cap of around £5.7bn, compared to £3.6bn for Meggitt, so the two companies aren’t that different in size. According to the newswire, Meggitt has refused to comment so we don’t know any more yet.

However, if there’s any substance to the story, my understanding is that London Stock Exchange rules will require Meggitt to make a statement fairly soon — early next week, at least.

Meggitt share price is still below 2019 levels

Although Meggitt stock has risen sharply over the last year, it’s worth remembering the shares crashed hard when Covid-19 shutdown the world’s airlines last year.

Meggitt’s share price fell from over 600p in February 2020 to hit a low of around 220p. Although the stock is now trading around 520p, Meggitt’s market valuation is still lower than it was before the pandemic-related crash.

Although management expects a full recovery to take several years, I can still see value in Meggitt’s business for a trade buyer with a long-term view.

Time to buy?

Meggitt has a history of double-digit profit margins and strong cash generation. Its components are used in most modern airliners and also in 80% of military fighter jet programmes.

Despite last year’s difficult conditions, Meggitt hasn’t run up excessive levels of debt and hasn’t needed to raise cash by selling new shares. In my view, this is a good business. But everything has its price.

Aviation body IATA believes it’ll take until 2024 for air traffic to return to 2019 levels. I reckon Meggitt’s profits may also take a similar time to recover to the peak levels seen in 2019.

Today’s share price surge has left Meggitt trading on 20 times 2022 forecast earnings. Buying at this level might make sense for a trade buyer like Woodward. It should be able to make cost savings and reinvest earnings in future growth.

But, as an outside investor, I think Meggitt shares are too expensive. I’ll be watching with interest, but I won’t be buying today.

One stock I like the look of is Meggitt Group (LSE:MGGT).

FTSE 250 opportunity

Meggitt Group is an engineering firm that operates in three divisions: civil aerospace, defence, and energy. Aerospace produces core components that many aircraft rely on. MGGT’s markets for aerospace include civil aircraft, helicopters, engines, and business jets. Over 50% of the group’s revenue comes from its aerospace division. Defence is the second biggest revenue generator for MGGT, with over 30% from military aircraft, vehicles, naval, and space markets.

Since the turn of the year, MGGT has lost over 55% of its share price value, primarily due to the market crash. A pre-crash high of nearly 700p per share in January is a stark contrast to its lowest point of 217p in April. We are four months on and shares can be purchased at just 277p per share. I believe there is a good opportunity to pick up cheap shares.

MGGT’s defence division is where I feel the opportunity lies. Aerospace has been most affected but I believe the aviation industry as a whole will slowly recover.

Performance

Last week, MGGT released interim results for the six months ending 30 June 2020. As expected, its aerospace division has been adversely affected while defence performed well. This offset some of the losses of aerospace and energy. Overall, group revenue was down 13%. Defence revenue grew 7% whereas aerospace saw revenue decrease by 27%, and energy was also down 6% compared to the previous year. Underlying profit was 37% lower at £102m compared to the same period last year.

Due to the economic downturn, initiatives to conserve cash meant MGGT is on track to deliver cash savings of £400 to £450m for the full year. MGGT also has a good amount of liquidity to see it through the current period with almost £900m in cash available across its revolving credit facilities (RCF). In line with many other FTSE-listed companies, MGGT decided to suspend an interim dividend to retain cash.

Here’s what I’d do now

During the economic downturn I have actively discouraged purchasing airline stocks across the FTSE because there were just too many unknowns. Now that restrictions are easing, and given pent-up demand, I’m more confident in a recovery in the aviation industry.

Meggitt Group has a good track record of profit, stability, and a burgeoning defence division. It says that its parts are fitted to “almost every jet airliner, regional aircraft and business jet in service”. This fills me with confidence for the aerospace arm of the business.

That said, I think defence will be a priority for many governments due to the pandemic and economic uncertainty. If you are looking for a contrarian buy this may well be one for you at its current rock bottom price. You may have to show patience with this one, though.

The stock surged to nearly 900p in June, when investors expected a return to regular flying with the help of safe travel corridors. Things haven’t turned out that way and the outlook remains uncertain. easyJet’s share price is now down below 600p again.

In this piece I’ll explain why I remain positive on this budget operator. I’ll also look at an aviation stock I’d buy today.

The easyJet share price should rise, but I’m not buying

easyJet boss Johan Lundgren says that the airline now plans to fly “slightly less” than 40% of its planned schedule for this quarter. This may put extra pressure on the group’s finances, but I don’t think investors need to be too concerned.

easyJet has raised more than £2.4bn since the pandemic started, through a mix of debt, aircraft sales, and new equity. I think this will probably be enough to allow the airline to get through this difficult period.

Indeed, on a medium-term view I’m confident easyJet will remain successful. I think there’s a good chance easyJet’s share price will be back at 1,000p within five years. However, despite this tempting gain, I’m still not buying.

The reason for this is that I just don’t invest in airlines. As my colleague Alan recently explained, easyJet may be a good business, but it’s in a bad sector. There are simply too many things that can go wrong.

If you want exposure to the aviation market, I think there are better choices.

I’d fly with this stock

Despite my decision to avoid airline stocks, I think that the aviation sector will make a steady recovery. Given this, one stock I would consider buying right now is FTSE 250 engineering group Meggitt (LSE: MGGT).

Meggitt operates in three sectors – civil aerospace, defence, and energy. Civil aerospace and defence are the most important and generate about 90% of sales.

Given the uncertain outlook for the economy, I think the defence business is a key attraction at the moment. Trading in defence has been stable this year, and I don’t see any reason why this should change.

On the other hand, sales in Meggitt’s civil aerospace division fell by 27% during the first half of this year. New orders dried up and demand for maintenance parts slowed, as aircraft were grounded all over the world.

However, the company says that its parts are said to be fitted to “almost every jet airliner, regional aircraft and business jet in service”. Demand may be low right now, but I’m confident it will recover as flying levels start to rise.

Meggitt’s share price has followed the easyJet share price downwards this year. Both stocks have fallen by around 57%. However, I think Meggitt’s history of strong profitability and the stability of its defence business make the shares a more appealing buy than easyJet.

Broker forecasts suggest that Meggitt shares are currently trading on 15 times 2020 forecast earnings. That multiple falls to 12 times earnings for 2021. With the share price at a 10-year low, I reckon now could be a great time to buy.

When the markets crashed, travel stocks and those that rely on the travel industry got walloped, so they are cheap. A coronavirus vaccine should help the travel and tourism industry get back to normal sooner than expected, which could mean swift travel stock price rises. Here are two stocks that could make you rich from a successful coronavirus vaccine.

SSP Group

Owning hundreds of shops selling high margin sandwiches and sausage rolls sounds good. Unfortunately for SSP Group (LSE: SSPG) its outlets, like Upper Crust and Caffé Ritazza, are often found in train stations and airports, and hungry travellers have been scarce.

The impact of the coronavirus on SSP and its employees has been severe. However, the medium-term prospects for the company look a little brighter. Passenger numbers are picking up in the US, Europe, and the UK – where SSP operates – and they need food for their journeys.

The market crash wiped 60% off the price of SSP shares. Right now, they are trading around 260p, which is cheap by historical standards. Should a coronavirus vaccine be released, SSP’s performance should recover much faster than is currently expected. I would expect SSP’s share price to take off under such a scenario, which could make investors rich.

But what if a vaccine does not materialise? Well, SSP has enough liquidity, and access to more if needed, to see it through its most pessimistic scenario. What this means is that the company is likely to be around in the future vaccine or no vaccine. 

Meggitt PLC

The coronavirus crisis has grounded fleets of planes across the world. Meggitt (LSE: MGGT) makes components and sub-systems for airliners. Fewer plane orders by airlines have put a dent in Meggitt’s sales of bits and pieces for new aircraft. Less scheduled and unscheduled maintenance of aircraft has also cost Meggitt sales.

Air travel is now picking up but remains well below normal. The current thinking is that it will take years for passenger numbers to get back to 2019 levels. A coronavirus vaccine would turn these assumptions on their head. Meggitt’s share price should benefit substantially from aircraft sales and activity hitting 2019 levels much sooner than currently expected.

The market crash wiped almost 60% off the value of shares in Meggitt. At a current price of 310p or so, shares are trading at about 12 times consensus earnings for 2021. Meggitt’s stock price-to-earnings multiple is usually around 14. What this suggests is that Meggitt’s stock is cheap at the moment. A coronavirus vaccine would lift 2021 consensus earnings, which would justify a higher price based on the P/E multiple. Meggitt stock could make an investor rich if a coronavirus vaccine is discovered.