FOR WEDNESDAY – Why I’d still avoid Cobham and raise a glass to this FTSE 250 share instead

Dial being turned up to 'high'
Dial being turned up to 'high'

Despite management’s efforts to boost the company’s financial strength, since 2015 Cobham(LSE: COB) shares have not rewarded its long-term investors. Unfortunately I do not think 2019 will offer anything different or cheerful to write home about for this Dorset-based defence and aerospace firm.

Have we seen the last of the profit warnings?

Over the past two years, the group has been issuing one profit warning after another while investors are waiting for the shares to form a base. But it just is not happening…

Cobham is a clear leader on two niche areas: first, it literally holds a monopoly on air-to-air refuelling of aircrafts. Secondly, the company is the sole provider of sophisticated data and voice communications equipment to Airbus — as part of the latter’s aviation safety and the connected cockpit programme.

However, in recent years the management went on a rather expensive acquisition spree which left the group under a significant debt burden and diluted these two niche segments. Furthermore, its balance sheet problems are not likely to end until it can finalise the outstanding issues with Boeing. The two companies are tangled in a disruptive dispute about their partnership on Cobham’s KC-46 aerial refuelling programme. Boeing has been making “unquantified damages assertions” and holding payments.

As a result of the sales slump, the profit fall and the unpredictable earnings growth, year-to-date the shares are down over 25%. However, the company still has a rather high P/E ratio of almost 28 and thus is not a value play. There is not much indication for the earnings to return to growth in 2019. In 2017, the company cut its dividend payment, which it had made for over forty years. Therefore, it is not a dividend recommendation either.

If you are considering Cobham for your 2019 portfolio, you may want to stay on the sidelines at least in the first half of the year until there is more guidance from the company. For now, any share price gain is likely to be a relief rally than a sustained turnaround.

Consumer thirst translates into higher earnings for Britvic

FTSE 250 offers investors plenty of British companies with growing profits. I would, for example, take a closer look at Britvic(LSE: BVIC), the leading producer of soft drinks, whose risk/reward probability looks quite favourable.

Many households are familiar with Britvic’s still or carbonated drinks, including Robinsons, Tango, and J2O. The group also holds the exclusive rights to make and market Pepsico‘s global brands in the UK.

In late November, the company reported a 5% increase in revenues. It also increased dividends, now giving investors a 3.5% yield. Analysts noted that BVIC’s bottom line had not been affected by the government’s recent sugar tax as consumers moved to lower sugar alternatives. I believe the bottom line will continue to benefit from the increase in the sales of sugar-free fizzy drinks.

In addition to its UK operations, through franchising, exports and licensing, management has been increasing its reach overseas, including sizable operations in Ireland, France, and Brazil.

The P/E ratio stands at 18. I expect the company to continue to grow and to increase earnings in years to come; therefore I am for now quite happy with this number. If you are looking for shares to hold for a long time comfortably, I would include Britvic in this year’s portfolio list.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.