Questor share tip: GKN is flying high in aerospace

GKN

227.9p -11.1p

Questor says Buy

GKN is a company that falls between stools. Generally seen as a manufacturer of car parts, it also makes hi-tech parts for cranes, tractors, aeroplanes, military vehicles, trains, and low-carbon technology.

While the car business is important, GKN's dominant position in other markets is often overlooked.

Aerospace, for example, counts for almost a third of GKN's sales. If you flew in a Boeing plane on holiday this year, you would most likely have been looking out of a GKN window.

It is also the leading company in the world for some wing parts and engine components used in both military jets and passenger planes.

The aerospace market is looking healthy right now. Andrew Gollan at Investec says production of passenger planes is set to rise steadily to 2014, and possibly beyond; while defence spending should remain stable, with older programmes being replaced by new ones.

GKN is in a particularly good position to benefit as a specialist in lighter, composite materials, where demand is growing because of environmental concerns. The lighter your plane is, the less fuel it takes to get it up in the air.

The company's other overlooked sector is Land Systems, which sells parts for tractors, combine harvesters and mining equipment, among others. Things are looking up here, too, with both agriculture and mining recovering as commodity prices rise.

On Monday, GKN said it would spend £174m, including debt, on a German company called Stromag to build up this division.

Stromag sells clutches and brakes that can be used in a range of things from agricultural equipment to wind turbines, to customers across Europe. The deal gets GKN into renewables, where it wants to be when governments start splashing cash on reducing emissions.

Car parts still represent almost 60pc of GKN's sales and the recovery in the car market has lifted the shares in recent months. After a horrific slump in 2009, vehicle production jumped 24pc last year. Most analysts predict a continued recovery, with Mr Gollan forecasting 6pc growth over the next three years. Crucially, emerging markets represent 25pc of GKN's sales, where much of the growth will come from.

One factor investors should keep an eye on is safety at GKN. The company has had two serious accidents this year in a powder metallurgy plant in Tennessee.

It announced the most recent of these, in which three people died, to the market. In January, there was another fire in the same plant where two people died. Guy Stainer, director of investor relations at GKN, says the company did not report the first to the market because "the financial impact was not very large".

He says GKN has a good track record on safety apart from the recent experience at this plant, and the entire company is now focused on making sure it does not happen again. It has set aside £30m to cover the cost of the most recent accident. It has not, however, set any money aside for possible legal action. Stainer says this should be covered by insurance, if necessary.

The shares have had a terrific run, but still look undervalued when you take into account GKN's position in aerospace.