Shares in Meggitt (MGGT) have declined by 60 per cent this year, as the company’s key segments were disrupted by the Covid-19 pandemic. It has underperformed the FTSE 100 Index and the Industrial Select Sector ETF (XLI), which have dropped by 26 per cent and 10 per cent, respectively.
In this article, we look at reasons fuelling Meggitt’s struggles, and whether the company's shares are a bargain at the current price.
Meggitt share news: why has the stock been lagging?
Meggitt is a London-headquartered industrial company that operates in the civil and defence aviation industry and oil and gas industry. The civil aviation business accounts for 56 per cent of its revenue, while the defence and oil and gas industries account for 36 per cent and 10 per cent, respectively. Its products are used in most airplanes across the world.
The company operates its business through four segments: airframe systems, engine systems, energy and equipment, and services and support. The airframe systems business, which includes products such as fuel systems and sensors, account for 47 per cent of Meggitt’s total revenue.
It is followed by the services and support division which accounts for 21 per cent of income, and the energy and income division that represents 18 per cent of total revenue. Engine systems is the smallest division, accounting for 14 per cent of revenue.
The Covid-19 pandemic has brought significant challenges to the civil aviation and oil and gas industries. According to Cirium, more than 40 airlines have filed for bankruptcies and many others are struggling to stay in business.
In the US, major airlines, including Southwest (LUV), United (UAL) and American (AAL) have received billions in federal funding. The same is true in other countries, including Japan and Germany. Other companies operating within the industry, such as Boeing (BA), Airbus (AIR), Rolls-Royce (RR) and General Electric (GE) have also suffered.
Similarly, the oil and gas industry has also been hit severely because of significantly lower crude oil prices. This has seen most companies in the sector slash their capital expenditure (capex), hurting Meggitt’s business. In its report in April, S&P Global said that 12 oil majors had slashed their capex by more than $43.6bn.
In the second quarter, Meggitt’s organic revenue growth slowed by 13 per cent, as its civil aerospace and energy division revenue fell by 27 per cent and six per cent, respectively. That was partially offset by the defence sector whose revenue rose by seven per cent. It posted a loss of £349m, which was significantly lower than the £91m profit in the same quarter in 2019.
To deal with the crisis, Meggitt’s management has focused on cost-cutting by slashing 18 per cent of the total workforce, halting pay hikes and reducing other variable spendings. It also sold Meggitt Training Systems for $146m.
Meggitt share price analysis: the success story disrupted by the pandemic
Meggitt went public in 1995. Prior to the Covid-19 pandemic, the company's shares were up by more than 1,000 per cent since their listing on the London Stock Exchange. Such a hike was possible as, overall, civil aviation has grown exponentially over the years.
For example, according to the Bureau of Transportation Statistics, US airlines carried more than 925m passengers in 2019. That was a 300m increase from 2003. The same growth was seen in many other countries across the globe.
The oil and gas industry had also been growing as companies continuously increased their exploration budgets. In 2019, the global oil and gas upstream capital expenditure was more than $490bn.
However, this year’s novel deadly disease has disrupted most of the industries, with MGGT shares experiencing their steepest decline on record in 2020.
Meggitt share price forecast for 2021 and beyond: what happens next to the stock
Meggitt stock will likely continue being under pressure in the near term as the number of Covid-19 cases continues rising around the world. In recent weeks, a new wave has emerged in European countries like Germany, France and Spain. The US, which is still in its first wave, is recording an average of 70,000 new cases every day.
If this trend continues, air travel will not go back to pre-pandemic levels any time soon. This means that many airlines will either cancel or defer their orders, negatively affecting Meggitt’s revenue and earnings.
Equally, the oil and gas business will continue wobbling in the next few years as demand remains substantially low. That is because the airline industry is one of the biggest consumers of oil.
Indeed, in recent reports, analysts at the International Energy Agency (IEA) and the Energy Information Administration (EIA) have warned about low demand in 2020 and the first half of 2021. The impact of this is that many companies in the sector will continue cutting costs, which will affect Meggitt’s performance.
The defence will be the only stable segment for the company since countries like the US, China and Japan are still boosting their purchases.
Therefore, Meggitt’s stock will continue being sensitive to the latest developments in the virus-related news. Moreover, the upcoming US election might also have a significant impact on the company’s future. If Joe Biden wins, it could mean less defence spending in the US and more regulations in the oil sector, which are not good for the company. The shares will also react to the firm’s third-quarter results that will come out on November 10.
Let’s now look at the Meggitt share price forecast offered by analysts.
As analysts see it: Meggitt share price prediction
Lately, analysts have been relatively muted on making their Meggitt share price forecast. In July, JP Morgan (JPM) upgraded their outlook for the stock from £2.85 to £3.05. In the same period, analysts at Morgan Stanley (MS) raised their forecast to £3.56, which implies a 21 per cent increase from the current price. Analysts at Berenberg and Jefferies have a buy rating on the stock. In total, according to data compiled by MarketBeat, the average target for the stock is at £3.56.
On the other hand, according to WalletInvestor, the stock is expected to plunge even lower, closing 2021 at £2.84 and falling to £1.97 by October 2025.
The short-term Meggitt stock forecast: from the technical perspective
On the four-hour chart, Meggitt stock gapped lower last week as the number of Covid-19 cases continued to rise. The price is below the 50-day and 100-day exponential moving averages. It has also re-entered the descending channel that is shown in white, which is an indication that bears have returned. This means that the price will break below the current bearish pennant and as bears attempt to retest the lower side of the channel at £2.44.
Meggitt stock has been under intense pressure this year. Unfortunately, the company, together with others in the aerospace industry, will continue struggling until the Covid-19 vaccine is found. While the vaccine will not instantly revive the sector, it will become a sign of hope of a soon recovery.