The outlook for UK defence companies is brighter than for the general engineering sector, which has ...
The outlook for UK defence companies is brighter than for the general engineering sector, which has been in decline for the past decade.
From December 1990 to December 1999 the FTSE All Share engineering sector has underperformed the FTSE All Share by 81%.
Tony Nutt, investment manager at Jupiter Asset Management points out that engineering companies are rated quite low, especially those with exposure to the automotive sector.
"The money going into the automotive sector has been declining all year, especially with the demise of Rover, despite value stocks having rallied with the decline of technology, media and telecoms." Steven Payne, UK fund manager at Framlington says he is not very keen on engineering stocks and that the slowing global economic backdrop has not been favourable to them. Valuations in the general engineering and machinery sectors remain low, he says.
Payne notes that there has been a drip feed of profit downgrades among engineering companies with a number of them alluding to the US slowdown affecting performance.
Glynwed has issued a profit downgrade and is planning to demerge two of its main business areas. The company does not look attractive and its output remains poor, Payne says.
Nutt notes that Invensys was one of the first companies to issue a profit warning in September and then saw its price fall 40%. Nutt and Payne agree that the defence sector is one of the more attractive sectors.
Payne says: "Aerospace looks better with defence spending on the increase. The joint strike fighter programme is creating healthy demand in the sector. The commercial side is doing better than expected. We had been expecting a slowdown from Boeing but it has not been as bad as forecast, overall it looks good."
According to Nutt, sentiment on the defence sector will be directed by the pronouncements made by the new US government. "Defence spending has been slowing for the past decade," he says. "The US is the big, defence manufacturing base, we are seeing more UK companies making alliances with US companies."
Nutt says that while he is upbeat on the outlook for the sector spending will probably continue to slow.
"The size of defence projects is getting larger but the number of them is getting smaller," he says. "We are seeing consolidation in the sector, especially in the US with aerospace."
Jupiter is underweight defence as it thinks defence stocks are fairly valued. It is a sector to invest in when there are a significant number of profitable orders, which it is not seeing enough of to convince it that the sector is undervalued.
Valuations in aerospace are higher than in general engineering but justifiably so, Payne thinks. Framlington is overweight aerospace and defence. Its largest holding is in Cobham and it also has holdings in Smith Industries.
Jupiter is marginally underweight engineering.
Nutt notes that T.I. Group and Smith Industries are merging in an attempt to get a higher rating, which, thus far, has not succeeded.
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