However, not all UK shares are flattish today. Here’s why these British stocks are either powering ahead or plummeting in start-of-week business.

Senior soars on new offer

The Senior (LSE: SNR) share price has soared 11% in Monday business, taking total gains over the past year to 123%. The small-cap has soared to 169p after suitor LSF XI Investments returned with an increased offer price.

Senior — which has rebuffed LSF’s acquisition attempts four times prior to today — said the cash offer terms had been improved to 200p per share. This is up from LSF’s last bid of 185p, which was rejected last week.

UK defence share Senior is perhaps best known for building parts for the aerospace industry. It’s been hit hard by the impact of Covid-19 on the civil aviation sector and latest financials showed sales at its Aerospace division fell 25% year-on-year in the first quarter.

Ilika continues to lose power

Ilika’s (LSE: IKA) share price has, by contrast, sunk in start-of-week trade. Down 5% on the day at 147.5p, gains for the past 12 months have been trimmed to a still-mighty 173%. Investors have sent the UK electronics share to six-month lows following the release of fresh trading numbers.

The solid-state battery maker said revenues dropped 18% year-on-year to £2.3m during the financial year to April. This, in turn, prompted its adjusted EBITDA loss to widen to £2.3m, from £2.1m a year earlier.

Ilika also said cash and cash equivalents had fallen £5m year-on-year to £9.8m. The business will release full-year results on Tuesday 6 July, it said.

UK share Capita rises on trading and disposal news

The Capita (LSE: CPI) share price meanwhile has leapt 6% following the release of fresh financials. Though at 39.85p, the FTSE 250 share still trades 18% lower than it did a year ago.

The UK support services share said it has enjoyed “an improving trend in our trading performance in the first half of the year.”

As a consequence it expects to record its first annual sales rise for six years in 2021. Capita also said it’s won a number of significant contracts including The Royal Navy and Tesco Mobile. The outsourcing giant added that it continues to make “good progress” with its cost-reduction programme.

In other news, Capita said it has agreed to sell its 51% stake in AXELOS Limited to PeopleCert International. The best practice business — a joint venture established with the Cabinet Office in 2013 — will provide Capita with a total cash windfall of £183.6m.

A 12% drop early Thursday morning didn’t help, on the back of a trading statement that was less buoyant than at the interim stage. 

Despite 2019 performance set to be “broadly in line with our expectations,” according to chief executive David Squires, there was unexpected news that “in recognition of the challenges in some of our Flexonics and Aerospace markets, Senior is implementing a restructuring programme to drive improved returns.”

Restructuring

The restructuring is going to include job losses, cost-cutting, moving “major work packages” to cheap-labour Asian countries, and closing the firm’s South Carolina aerospace facility by early 2020. The new strategy, dubbed ‘Prune to grow’, is set to incur a restructuring charge of around £20m, with £6m in cash costs expected to show up in the 2019 books.

With this happening, and the firm already well into the disposal of non-core businesses, is it a good time to invest? I don’t think so. Despite the share price slump, we’re still looking at a P/E of around 12. That’s not high, but it’s not low enough to attract me to a company facing Senior’s difficulties.

The fact that cutting costs has become a priority also makes me cautious over the forecast 4.2% dividend yield. Although it would be twice covered, should a company facing a costs squeeze be paying out so much? Especially when it was shouldering net debt of £268m at the end of the first half?

My pick

I’d be going for BAE Systems (LSE: BA) instead, which also released a trading update Thursday.

BAE shares are up 27% over the past five years, but as the price has retrenched a little from a peak in July 2018, we’re looking at P/E multiples of around 12 to 13. That’s close to Senior’s valuation, but without the apparent need to prune to grow. The past six months of the current year have seen BAE shares starting to pick up again, forecasts are strengthening, and the company now says it expects underlying EPS to “grow by mid-single-digit percent.”

There’s a dividend yield of 4% on the cards, and we’re seeing the annual payment comfortably keeping up with inflation. If current forecasts come good we’ll have seen 12.5% dividend growth over five years, and that adds up to a very satisfactory overall return.

Dividend safe

BAE says it “continues to target in excess of £3bn of free cash flow over the three-year period 2019-2021, and expects 2019 net debt to be broadly unchanged from the net debt at 31 December 2018.”

At that stage, the debt figure stood at £904m, which looks like a very significant sum on the face of it. But it’s less than half the firm’s 2018 underlying EBITDA, which is a very respectable comparative. Coupled with such strong cash generation, I really don’t see any pressure on the dividend.

BAE’s dividend policy is one of “long-term sustainable cover of around two times underlying earnings and to make accelerated returns of capital to shareholders when the balance sheet allows.” I see that as both conservative and attractive, and BAE is a buy for me.

Despite this, the stock could offer investment potential. It has a low valuation as well as a track record of adapting to changing macroeconomic circumstances. Alongside a mid-cap share which reported an impressive performance on Monday, it could outperform the FTSE 100 over the long run.

Improving performance

The other company in question is international engineering business Senior (LSE: SNR). Its performance in 2018 continued to improve, with revenue moving 8% higher to £1,082m. Adjusted profit before tax increased 15% to £83m, enjoying a run of strong orders. Free cash flow has remained healthy, reaching £45.3m after investing £56.3m in capital expenditure in order to enhance organic growth.

With the company expected to post a rise in net profit of 17% in the current year, it appears to have a bright future. Its update suggests 2019 has started in line with expectations, anticipating continued improvements in is overall performance despite the current global macroeconomic risks.

Trading on a price-to-earnings growth (PEG) ratio of 1.1, Senior appears to offer a wide margin of safety at the present time. This suggests that after what has been a mixed 12-month period in terms of its share price performance, it could generate improving levels of capital growth in the future.

Relative potential

As mentioned, Next has a history of being able to adapt its business model to changing trading conditions and customer tastes. It arguably faces its greatest period of change at the present time, with consumers demanding a seamless omnichannel experience and the wider retail segment facing weak sales growth.

However, in recent quarters it has reported continued sales growth. Its investment in online retailing (in which it has a longstanding advantage due to its Directory operation) is paying off, more than offsetting ongoing declines in its store sales. Although many of its peers have been under pressure to invest in pricing, Next also continues to invest in its wider business, seeking to capture a larger share of the leisure retail segment with more in-store cafes and the like. This is likely to be a sound move in the long run, since consumers are favouring experiences over just buying goods to an increasing extent.

With Next forecast to post a rise in earnings of 4% in the current year, there are a number of FTSE 100 shares that offer stronger profit growth potential. However, with a price-to-earnings (P/E) ratio of around 11.6, it suggests the stock could offer good value for money, and may be able to generate improving levels of capital growth over the long run. As such, now could be just the right time to buy a slice of it.

In the long run, the company could have recovery potential. It now has a low valuation relative to the wider index. But is now the right time to buy the stock alongside another ‘falling knife’ which released an update on Wednesday?

Growth potential

The company in question is the manufacturer of high technology components and systems, Senior (LSE: SNR). It released a trading update which showed that it’s on track to deliver results which are in line with expectations for the full year. Its Aerospace division has benefitted from continued positive activity in the large commercial aircraft sector, with production ramping-up on newer programmes, such as the 737 MAX, A320neo and A350.

The company has continued to make progress on new product introductions on programmes won over the last year, and expects investment activity to continue into the first half of 2019. The construction of its new Aerospace facility is progressing well. Its Flexonics division also recorded trading for the period in line with expectations.

Looking ahead, Senior is forecast to post a rise in earnings of 9% in the current year, followed by further growth of 17% next year. This puts the stock on a price-to-earnings growth (PEG) ratio of 1.1, which suggests that it may have a wide margin of safety following its 22% decline in the last two months.

Recovery potential

As mentioned, Royal Mail has also experienced a challenging two-month period. In the near term, the company’s share price could come under further pressure, with its bottom line expected to decline by around 14% in the current year. This is significantly below previous guidance, and shows that the expected results of its efficiency drive have been lower than expected. And with investor sentiment being weak, there could be further falls in the company’s share price in the near term.

With a new CEO at the helm, a revised strategy is due to be put into action over the coming months. This could create a catalyst for improved financial performance in the long run, but may lead to a share price which drifts lower in the near term.

Following its share price fall, Royal Mail now trades on a price-to-earnings (P/E) ratio of around 8.4, which suggests it offers a wide margin of safety. Its long-term growth prospects could be boosted by rising demand for parcel delivery, as well as further investment in its international operations. Therefore, while potentially volatile in the near term, its long-term turnaround potential seems to be high, in my opinion.

The mid-cap index has delivered a number of big winners for investors in recent years. Today I’m looking at two FTSE 250 stocks which I believe could beat the market over the next few years.

Growing order book

Ultra Electronics Holdings (LSE: ULE) specialises in electronic systems, primarily for the defence and aerospace markets. Much of its business comes from the US, where defence spending is said to be increasing. The group is also involved in providing security and cyber solutions for government customers, another rapidly growing market.

Figures published by the company today show that its order book has increased by 19% to £969.2m over the last 12 months. That’s a strong performance, in my view.

Stumbling block

The group’s first-half performance was solid if not spectacular. Exchange rates caused reported sales to fall by 4.2% to £350.5m. But excluding this, revenue rose by 1.3%.

The story of the company’s profits was a bit more complex. Underlying pre-tax profit fell by 16% to £43.6m. About 5% of this was due to exchange rates, but most of the remainder seems to have been caused by £6.1m of cost overruns. This problem was flagged up last year and is affecting a handful of contracts in the group’s Herley business, which makes ruggedized electronics for aviation use.

A turnaround buy?

The group generated an operating margin of 13.7% during the first half. Excluding the Herley problems, this figure would have been 15.4%.

Both of these are attractive figures, but I’m concerned that the company doesn’t seem to know when these profit-sapping cost overruns will come to an end.

Another potential concern is that the group is currently under investigation by the Serious Fraud Office, for suspected corruption in Algeria.

These risks shouldn’t be ignored, but earnings are expected to rise by 12% next year. Trading on 15 times earnings with a 3% yield, I suspect Ultra Electronics could be a decent turnaround buy.

This rival is growing fast

Turnaround situations always carry a certain risk. What if the problems aren’t fixed and get worse?

One company that’s already delivering powerful growth is engineering group Senior (LSE: SNR), which makes products for aerospace, defence and land transport customers. During the first half of this year, Senior’s pre-tax profit rose by 31% to £31.4m. The group’s earnings were 25% higher, at 5.9p, supporting a 7% increase in the interim dividend.

The company said that trading was “slightly ahead of expectations” but said full-year expectations were unchanged. However, like Ultra Electronics, Senior is benefiting from a growing order book.

The firm’s book-to-bill ratio was 1.2 during the half year. This means that new orders booked during the period were worth 20% more than existing orders completed during the half year. Profit margins are also expected to improve this year.

Reading the company’s commentary, I think there’s a good chance that full-year figures could be slightly better than expected. Although the shares aren’t cheap, on a 2018 forecast P/E of 19, earnings are expected to rise by 17% next year and the shares offer a well-supported dividend yield of 2.4%.

I think Senior could be worth a closer look at this level, given the group’s strong momentum.

The FTSE 250 business provides a range of outsourced services to pharmaceutical and healthcare providers in more than 50 countries, and moves to broaden its operations through recent M&A action have given its profits outlook a significant boost.

City analysts are expecting earnings to leap 21% in the year to September, and by a further 11% next year. It is not hard to see why the number crunchers are so giddy in their assessments either, certainly if latest trading numbers are anything to go by.

Investing for future growth

UDG has spent a fortune on acquisition activity in recent times, the company having sealed six transactions at a total cost of $270m during the last fiscal year alone. Five of these were swallowed up by its core Ashfield arm, and they enhance the division’s ability to offer services that span all stages of the product lifecycle.

And a robust balance sheet — it has net debt of just $53.3m on the books — means that additional earnings-boosting buys are likely just around the corner.

The Dublin business is also forking out huge sums on organic investment. At Ashfield it relocated its commercial and clinical operations to a brand new base in the US to allow it to continue expanding in this mega growth market, while it also opened new offices in Japan and Ireland. Meanwhile, its Sharp unit has invested in new facilities in the US and in South Wales to enhance its packaging and distribution capabilities.

Nowadays UDG is a major partner with the world’s biggest drugs developers, and  its earnings-driving Ashfield unit took part in eight of the top 10 product launches in the US last year. With a steady stream of new treatments from all over the pharma sector hitting the market, I am convinced the services specialist should continue to deliver robust sales growth.

As a consequence, I believe UDG is worthy of its lofty valuation, a forward P/E rating of 28.9 times.

Flying high

Senior (LSE: SNR) is another FTSE 250 firm I am backing to record strong profits expansion now and in the future.

Indeed, its latest trading statement this week assured me of its strong outlook — it advised that “order books across most of our businesses remain strong and we expect to see improved performance in both divisions,” namely its Aerospace and Flexonics arms.

More specifically, I am particularly excited by the outlook for the firm’s flying division as new programmes ramp up across the industry. Senior noted that production volumes for newer programmes on large commercial aircraft from both Boeing and Airbus have boosted business more recently.

City analysts are expecting Senior to deliver earnings growth of 8% and 17% in 2018 and 2019 respectively. And the prospect of excellent profits rises thereafter suggests to me that a forward P/E ratio of 19 times is worth swallowing to grab a slice of the action.

Looking at the fundamentals for Meggitt (LSE: MGGT) shares, I reckon I’m seeing good value compared to the FTSE 250‘s long-term ratings for P/E and dividends. A forward P/E of 14.5, expected to drop to 13.2 by 2019 looks reasonable for a stock offering dividend yields of 3.6% to 3.8%, but there’s more to it than that.

Those dividend are twice covered by earnings, and they’ve been growing ahead of inflation for the past five years — by around 4.8% per year recently. And forecasts suggest that trend will continue for at least the next two years.

A trading update Thursday lent support for that, telling us of a strong first quarter which saw organic revenue up 6% (excluding foreign exchange and disposals). The company put that down to “a robust performance in the civil aftermarket and energy end markets.“

Civil aerospace revenue grew by 4% organically, with military revenue up 2%. Meggitt enjoyed growth in its fighter jet business coupled with good intake in the fourth quarter of 2017, though there have been delays in some projects which impacted Q1 this year.

Energy revenues grew by 39% organically, but that’s against a weak previous comparative period.

The company reckons on seeing 2% to 4% organic revenue growth for the full year, which makes me wonder if current forecasts for an 8% EPS decline are too pessimistic. I see good value here, from a company in a strong defensive position.

Impressive recovery

Following on from a great set of 2017 results, we had an update from Senior (LSE: SNR). Its shares are more highly rated than Meggitt shares at a forward P/E multiple of over 19. That’s almost certainly due to the firm’s encouraging recovery, after a couple of tough years which saw earnings drop significantly, and to stronger forecasts for the next couple of years.

There’s EPS growth of 8% on the cards for the current year, while the subsequent 17% expected for 2019 would drop the P/E to a bit over 16.

Again, we’re seeing a strongly progressive dividend record over the past five years, with Senior’s rate of progress coming in a little ahead of Meggitt’s — the Senior dividend has grown from 5.12p in 2013 to 6.95p in 2017, and that’s expected to grow to around 7.9p by 2019. Yields are a bit lower at 2.4% to 2.7%, but cover is equally strong and a faster growth rate could soon push effective yields (on today’s share price) up further.

Senior’s update confirmed that trading so far in 2018 has gone according to expectations. It did see a decrease in military aircraft spending, but the large commercial aircraft business was described as positive. The firm’s Flexonics Division “benefitted from growth in the truck, off-highway and upstream oil and gas markets, partially offset, as expected, by the decrease in passenger vehicles,” and that seems positive overall.

With Senior’s performance expected to be weighted more towards the second half, the firm expects “good progress to be made in 2018.” Its order books are strong, and improvements in both its divisions are expected. I rate Senior a buy too.

Share pickers were encouraged to keep piling in on the back of terrific full-year results. In 2017, Senior generated £1.02bn worth of sales, up 12% year-on-year and marking the first time the top line had barged through the £1bn barrier.

In other news, the Hertfordshire firm saw free cash flow jump 20% from 2016 levels, to £58.3m, which in turn helped net debt to drop by a chunky £42.8m, to £155.3m.

However, adjusted pre-tax profit ducked 3% to £73.1m, caused by a deterioration in margins (group adjusted operating margin dropped 120 basis points to 8.1%). Adjusted earnings rose fractionally to 14.39p per share.

The turnaround titan

Challenging market conditions have caused Senior to struggle in years gone by, the company chalking up two punchy bottom-line declines in the past three years. However, the FTSE 250 firm’s turnaround strategy is clearly beginning to pay off and City analysts are expecting earnings to rise 6% in 2018 and 17% next year.

The company today reported a “strong order intake” last year, Senior chalking up a book-to-bill of 1.15 times. And a strong aerospace market in particular leaves it in great shape to deliver meaty profits expansion in future years.

The plane parts builder commented: “The production ramp-up of new, more efficient, large commercial aircraft programmes means the outlook for the commercial aerospace sector is both strong and visible. Senior has healthy shipset content on all the large commercial aircraft platforms and has further increased its content on the new engine versions during 2017.”

Senior’s rapidly-improving balance sheet saw it hike the full-year dividend 6% in 2017, to 6.95p per share. And this, allied to its solid earnings outlook, is expected to keep shareholder payouts chugging higher.

In 2018 a 7.3p per share dividend is forecast, yielding a very-decent 2.5%. And next year a 7.9p payout is predicted, creating a 2.7% yield.

Now Senior may be a tad expensive on paper, its forward P/E ratio of 19 times sitting above the accepted benchmark of 15 times o below that indicates good value for money. But I consider this to be a fair premium given its robust position in growing markets and rapidly-improving balance sheet.

The monster yielder

Those seeking big dividend yields may not be tempted in by Senior. They may want to have a look at Low & Bonar (LSE: LWB).

Like the engineer, I am tipping the performance materials play to keep thriving in difficult markets, a sentiment shared by the Square Mile’s army of number crunchers — earnings advances of 7% and 8% are forecast for the years to November 2018 and 2019 respectively.

And these bright projections are also set to keep dividends marching skywards. Thus a payment of 3.05p per share last year is expected to rise to 3.2p this year, and again to 3.4p in fiscal 2019. Yields stand at 5.3% and 5.7% for this and next year.

Today Low & Bonar can be picked up a prospective P/E ratio of 8.7 times. This is far too cheap in my opinion given that sales are rocketing (up 11% last year to £446.5m) and cost-cutting is clicking through the gears.

However, at the same time, the company could have tremendous investment appeal. Its low valuation, high yield and potential return to growth could allow it to generate strong share price growth in future years.

Margin of safety

Following its share price fall, Saga now trades on a price-to-earnings (P/E) ratio of just 9.2. This suggests that the market has fully factored-in its disappointing near-term outlook. This means that there could be a wide margin of safety on offer. This might equate to limited downside as well as high upside potential in the long run.

Looking ahead to next year, the company is expected to return to positive earnings growth. Certainly, its forecast 3% decline this year will only be offset by 3% growth which is pencilled in for 2018. However, next year’s outlook shows that the company may be in only a temporary slump from which it can deliver a strong recovery. With the outlook for the UK and global economies being uncertain but still generally positive, the business may enjoy better-than-expected financial performance in the coming years.

Income prospects

After its share price fall, Saga now has a dividend yield of 7.2%. This is clearly a highly enticing yield at a time when inflation is continuing to move higher. However, the company’s dividend growth rate could also add to its income appeal over the medium term. Next year it is forecast to record a rise in shareholder payouts of 4.7%, which is ahead of the rate of inflation. And with dividends being covered 1.5 times by profit, they seem to be highly sustainable.

Another income option

Also offering positive income prospects at the present time is high technology components and systems manufacturer Senior (LSE: SNR). It reported a contract win with Spirit AeroSystems on Wednesday. The contract will commence in 2019 and will provide machine details and subassemblies on Boeing commercial aerospace programmes. This is a significant contract win which could help to boost the company’s future financial performance.

Looking ahead, Senior is forecast to grow its bottom line by 14% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.2, which suggests that it offers significant upside potential. With dividends due to rise by 6.1% next year and being covered 2.1 times by profit, the company could have income appeal even though it currently yields just 2.7%. As such, it could offer an enticing mix of capital growth as well as an improving income return over the long run.

In my experience, solid defensive stocks like National Grid provide a solid foundation for a long-term portfolio. But investment performance can often be improved by adding a mix of smaller companies with the ability to grow profits — and dividends — much faster than inflation.

I’ve identified one FTSE 250 stock which could be the perfect partner to the UK electricity giant.

Business as usual?

National Grid’s recent half-year results were a good example of the kind of ‘business as usual’ performance investors have come to expect from the group.

Adjusted operating profit rose by 4% to £1.4bn, while the interim dividend rose by 2.1% to 15.49p, in line with the group’s payout policy. Shareholders also received a bonus thanks to an 84p per share special dividend. This was funded using £3.2bn of the cash received from the sale of the group’s Gas Distribution division.

Looking ahead, the picture is rather mixed. The group’s shares have fallen by around 20% from May’s 52-week high of 1,097p. This has probably been driven by downgraded earnings forecasts for the current year. City analysts who follow the stock have cut their forecasts from an average of 70.3p per share in May, to just 59.9p per share today.

That’s a little disappointing, but I don’t think it takes away from the long-term income appeal of this group. Indeed, this fall means that the shares now offer a forecast yield of 5.2%. This looks supportable to me and could be a savvy long-term income buy.

I need some growth

However, I believe the performance of most portfolios can be improved by owning dividend stocks with growth potential. One possible choice is FTSE 250 engineering group Senior (LSE: SNR).

This company’s main focus is on the defence and aerospace sectors. It’s had a tough few years but now appears to be in the early stages of a successful turnaround.

On Monday the group reported a significant new contract to manufacture parts for Boeing and advised investors that full-year adjusted pre-tax profit is now expected to be “slightly ahead of previous expectations”.

Still time to buy?

Senior shares have already risen by 40% this year. This rise has priced-in improved profits and left the stock trading on a 2017 forecast P/E of 20. So is it too late to buy?

I don’t think so. The group’s turnaround is still at a relatively early stage. With good management, I believe this firm has the potential to deliver strong earnings growth over the next few years. Analysts expect the group’s earnings per share to increase by 16% in 2018, for example.

These shares also have an impressive track record of income growth. The payout has not been cut since 2001 and has risen by an average of 11% per year since 2011.

Although the stock’s current yield is a relatively modest 2.5%, investing today could open the door to a market-beating mix of income and growth over the coming years. I believe Senior is definitely worth considering at current levels.