This FTSE 100 turnaround stock may be an even bigger bargain than BT Group plc

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GKN

Telecoms giant BT Group(LSE: BT.A) made a number of bad calls lately and today trades at a lowly valuation of just 10.19 times earnings. Many investors are seeing this as a buying opportunity, which it may well be, but I reckon I have seen a better one.

Gimme a G...

Engineering company GKN(LSE: GKN) is also trading at just 10.19 times earnings, after being punished by falling margins in the aerospace industry. Today's share price of 316p is almost 17% down from its 52-week high of 379p. That  valuation looks tempting, but what are its prospects?

Last month, GKN reported a positive set of first-half results yet still disappointed the market. Sales rose 15% (5% organic), while reported profit before tax soared from £182m to £559m, and free cash flow from £40m to £116m. Given those numbers, you might have expected its share price to rocket, but investors kept their feet firmly on the ground on warnings that growth rates may struggle to keep up with last year's tough comparisons.

Margin call

Investors are troubled by GKN's trading margins, which narrowed from 8.6% to 8.4%. Its aerospace division is a particular concern, with margins down from 9.9% to 9.3%, due to higher UK pension costs, asset writedowns and operational challenges in North America. Organic sales growth in its aerospace division also failed to fly with reported growth of just 1%. Margins in its Driveline business slipped from 7.9% to 7.8%, and from 12.6% to to 11.3% in Powder Metallurgy.

However, these disappointments seem to be reflected in the share price. GKN's outlook still looks promising, with an 8% rise in military aerospace sales offsetting a 1% drop in commercial deliveries. Rising automotive sales in China will further boost GKN Driveline and GKN Powder Metallurgy.

Our friend electric

GKN has positioned itself for accelerated electric car sales, which looks a prescient move, and has already delivered 400,000 systems to its global customer base. Its 2015 purchase of Fokker also appears to be paying off. The yield is only 2.8% but nicely covered 3.5 times and management policy is progressive, with a recent 5% hike in the interim dividend to 3.1p per share. 

BT Group is yet to recover from the far greater shock of its Italian banking scandal. At today's 294p it remains more than 25% off its 52-week high of 400p. Last month's Q1 results did little to repair sentiment, with adjusted EBITDA earnings down 2% to £1.79bn, and reported revenue climbing just 1% to £5.84bn. 

Sky fallout

BT has other concerns aside from Italy, such as increased pension costs and business rates, the costly battle for sports programme rights amid signs of declining viewer interest, and the cost of investing in the business. Chief executive Gavin Patterson has a lot more on his plate, as sales slow, Ofcom intensifies its regulatory assault on BT's Openreach network, and the excitement generated during the glory years of its Premier League challenge to Sky fades.

The 5.23% yield still attracts and BT rewarded shareholders with £200m of buybacks in the quarter. However, its wall of worry seems far more daunting than GKN's right now, and the engineer would be my preferred pick of the two.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of GKN. 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.