GKN fight-back set to continue

It hasn't been a great year for GKN so far. The aerospace and automotive engineer has lost about a third of its value as demand for agricultural equipment crumbled and the global economic outlook deteriorated. But both of the company's core divisions are doing well, and the dramatic de-rating looks overdone.

In fact, third-quarter results were slightly better-than-expected. A £119 million currency hit from the strong pound hit the top line, but organic sales grew 3% to £1.79 billion. Trading profit rose 5% to £160 million, or 14% like-for-like. Pre-tax profit jumped 6% to £139 million.

"We see little change in our markets for the remainder of the year," said GKN. "The automotive market is forecast to remain positive with a lower rate of growth in the final quarter. Aerospace markets are robust whilst the agricultural equipment market looks set to continue its recent decline."

Aerospace stands out. Making lightweight composite wing parts for Airbus and Boeing generated profit of £72 million, up 18%, on organics sales 3% higher. A £4 million milestone payment from an old joint venture helped. Without it, margin increased by 160 basis points. Next year may be tougher, however, as weak demand from defence contracts offset rising civil aircraft deliveries.

Automotive did well, too. The Driveline division grew profit by 7% to £62 million even after a £5 million FX hit. Good growth in China, North America and Europe offset a fall in sales in Japan and Brazil. Currency headwinds knocked profit at the smaller metallurgy unit.

But it is the Land Systems operation that looks ugly. The outlook for agricultural equipment "progressively worsened" during the period and sales tumbled by 15% - 10% organic and 5% currency - which halved profit to £8 million. It's unlikely to pick up during the fourth quarter either, and next year will probably be no fun as tractor sales struggle.

JPMorgan is unimpressed. The broker has cut forecasts for 2015 by 9% to 27.6p and by 7% to 30.7p for the year after. However, that's still growth of 5% and 11% respectively, which appears not to be reflected in a modest forward price/earnings (P/E) ratio of 11, dropping to 10 in 2016. It's also an unfair discount to the engineering sector. GKN shares briefly tested significant technical support at 281p recently, which continues to represent the downside. JPMorgan reckons the shares are worth 370p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.