Industrials

Report by Willis Welby

Willis Welby sees the clearest upside in MRO and BA, while remaining more cautious on RR despite strong fundamentals. MRO looks particularly mispriced, with its implied-to-Y3 EBITM ratio of just 28; Willis Welby believes the market is moving on from Garden Grove and sees either a refinancing or takeover as a potential catalyst, with 100%+ upside. BA has pulled back enough to become attractive again, with its ratio falling to 85 despite still-supportive defence spending. RR remains a high-quality business with strong aerospace franchises and growing SMR momentum, but at a ratio of 132 Willis Welby would not chase the shares.

Report by Willis Welby

Willis Welby screens UK large-cap growth stocks using their proprietary expectations-analysis approach, assessing share-price-implied margins and returns against consensus forecasts. Their latest screen covers companies above US$4bn m/cap, with consensus Y3 revenue growth above 6%, positive Y3 EBIT margins, attractive Y3 IROCE and implied-to-Y3 EBITM ratios below 110. Twelve stocks make the screen. Among aerospace names, BAE has the clearer defence-spending story, but Melrose looks more forgotten, with an implied-to-Y3 EBITM ratio of just 27, leaving scope for the shares to more than double. Compass remains a strong all-round compounder, while investment in new products has driven good underlying results at ConvaTec, which still offers 60%+ upside. Willis Welby also revisits AI-jeopardy stocks RELX and Experian: despite barrier-to-entry concerns, both are currently benefiting from AI through stronger revenue growth and higher margins and may now be very cheap.

Industrials

Report by Dragoneye Research

Since Dragoneye's initiation in early Jun, the share price has dropped by over 25%, offering a significant short opportunity. This decline was driven by several factors: persistent cash flow issues, concerns about past management incentives and motivations, and a growing recognition that aggressive accounting practices have inflated profits. These issues culminated in a significant cash downgrade following the first-half results. Dragoneye's exclusive 49-page report highlighted all of these problems. A recent follow-up report, after the first-half results, further emphasizes potential downside risks if more questions are raised about the company's use of factoring. Factoring appears to have boosted an already weak first-half cash flow figure, but this was not disclosed in the company's financial statements.

Report by The Edge

The companies highlighted in The Edge's latest report are all undervalued vs. their industry peers, while exhibiting strong fundamentals, including impressive profit margins and strategic leverage. European and US names include: 1) Melrose - divesture of its Aerospace division looks set to unlock considerable value for investors. 2) Solvay - the share price has rerated sharply higher following the successful spin-off of Syensqo earlier this month. 3) BorgWarner - ICE to EV opportunity. 4) MDU Resources - the next big utility play; activist involvement. Click on the button below for further information on how to capitalise on these and more spin-off opportunities.

Financials

Covid has found management having to take far longer with the GKN turnaround than they initially thought. As a result, Andrew Hollingworth wonders if Mr Market has forgotten what they are capable of. He considers the price of success - i.e. what value to ascribe to MRO should its turnaround be broadly successful. The short answer is: £15.7bn. This being the EV that he postulates current pre-split MRO is worth c.3 years from now (~125% return). For some investors an assumption of the Aerospace division's growth in the coming years + margin recovery + re-leveraging + this capital being used to boost equity returns sounds like a super-unlikely tri-factor of events. Andrew disagrees…