One to Watch: Rally good prospect

IT IS often difficult for both fund managers and personal investors alike to invest in a stock after a good run, as many fear they may have missed the rally. But doing this would be to look backwards rather than look at the potential in a business and what can be achieved in future. One stock that fits into this category is GKN, which touched 38p in February and has rallied strongly since.

GKN is an industrial business structured into four main divisions but the automotive and aerospace divisions are the main drivers of profitability, comprising 79 per cent of revenues. The company is a parts supplier to these industries and is highly operationally geared.

Although GKN's markets are operationally geared, its position within these markets is stable. The company has leading market shares in most of the areas in which it operates and there is little threat of entrants.

The past 18 months has been incredibly challenging for GKN as demand collapsed but the management took decisive action, restructuring the business and cutting jobs. MF Global estimates that margins can increase by 1.5 per cent to 2 per cent per annum with revenue growing at 9 per cent to 10 per cent year on year.

The company issued a trading update last month that indicated overall demand had been stronger than anticipated with signs of recovery and inventory levels stabilising. The industries GKN operate in are likely to remain volatile in 2010 but analysts are beginning to look towards 2011 and beyond.

Estimates for this year's earnings figure still vary widely but it is likely they will increase. MF Global forecasts the P/E to fall from 18.4x 2010 to 7.9x 2011E and then 5.1x 2012E showing the potential within the business.

The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.

Balfour Beatty

282p +5.7p

Broker says BUY

CITI has initiated coverage of construction group Balfour Beatty with a "buy" recommendation.

The broker said: "With the shares under-performing the FTSE all-share by 35 per cent in 2009 – and also an international peer group by circa 46 per cent over one year – we think now is a good time to revisit this stock."

Booker

47.25p +1p

Broker says ADD

CASH and carry group Booker has reported a slowing in like-for-like sales, Evolution noted.

But the broker said: "We argue that the valuation is broadly up with events for the time being, hence the 'add' recommendation. We would, however, view Booker as a core holding, given the scope of its growth opportunity."