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Barclays downgrades Meggitt on valuation grounds

Analysts praised last week’s “very strong” first-half revenue growth and said margins have the potential to pick up, but they think the recent share price rise and more positive outlook make other stocks more appealing

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Meggitt shares have jumped almost a third over the past four months

Shares in Meggitt PLC (LON:MGGT) dipped on Monday morning after the aerospace and defence engineer was downgraded by analysts at Barclays’ London arm on valuation grounds.

Even with the recent fall back, the FTSE 250 company has still seen its value climb by almost a third since the beginning of April, thanks in part to new contract wins, which allowed it to upgrade its full-year guidance.

READ: Meggitt ups dividend as organic revenue jumps in H1

In a note to clients, Barclays analysts called the 9% growth in organic revenue reported in last week's first-half results as "very strong”, and suggested management might be conservative by not upgrading its forecasts once again.

There is also scope for margins, which Barclays said were somewhat disappointing in the opening six months of the year, to pick up, given falling overheads, better purchasing power and improving “capital intensity”.

“However, we think this self-help potential as well as the current positive market outlook is now reflected in estimates and valuation,” read this morning’s research note.

“We also continue to note MGGT's lower exposure to the large jet market (~35% of revenues) vs. peers provides less potential for top-line-driven earnings growth.”

Analysts concluded: “We downgrade our rating to ‘equal weight’ (from ‘overweight’) with a 550p PT (up from 530p) & prefer Senior PLC (LON:SNR), where we see more top-line potential, and valuation and earnings aren't based on self-help.”

Meggitt shares were down 0.6% to 539.6p in mid-morning trading.

Quick facts: Meggitt PLC

Price: 589.8 GBX

LSE:MGGT
Market: LSE
Market Cap: £4.58 billion
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