Shares in GKN did not behave like those of a company that had just confirmed that it would meet full-year profit forecasts.

However, in falling nearly 9 per cent yesterday – the biggest drop in the FTSE 250 – the automotive and aerospace engineer fared only marginally worse than Invensys, FKI, Morgan Crucible and Charter, or any number of its smaller sector peers. Producing capital goods in a market where sentiment is still dominated by the likely actions of the US consumer is not an activity that the stock market is prepared to rate too highly for now.

If GKN caused especial offence, it was in reporting a disappointing performance from its powder metallurgy division – a more advanced method of traditional casting – which, although set to account for only 16 per cent of this year’s sales and 13 per cent of profits, has proved something of a bugbear for investors. Although Kevin Smith, GKN’s chief executive, has accelerated the turnaround of this division – built up over the past decade though acquisition – there remains considerable scepticism over its ability to meet longer-term forecasts.

So GKN’s disclosures that powder metallurgy had been hit by higher raw material costs – it is sensitive to metal prices – and by disruption from the completion of restructuring did little to advance its case.

However, the fact that the estimated £6 million shortfall from that division did not affect the company’s guidance towards £253 million of pretax profits for 2007 provided comfort that the wider group has prospered and been able to withstand a slower fourth quarter in North America, which accounts for about 20 per cent of sales. Here, production forecasts for the big three US carmakers have turned progressively worse over the past few months.

GKN’s advantage is that it is more widely spread than most of its peers. It has also spent the past few years shifting its manufacturing base closer to areas of stronger demand, from high-cost, low-growth economies to low-cost, high-growth countries, such as India, China and those of Eastern Europe. That has enabled operating margins to rise above 7 per cent in its core driveline divsion – which accounts for half of group sales and 8 per cent in off-highway equipment, which has benefited from the mining boom.

Combined with accelerating organic growth, GKN is expected to produce earnings growth in the mid-teens next year. At 285¼p, GKN trades at only nine times next year’s earnings, a discount to its sector, when it should trade at a premium. Reason enough to hold on for now.

TUI Travel

Alooming economic downturn may not be the best time to invest in a company that sells discretionary items such as holidays. The high price of oil and the continuing decline in short-haul package travel add further dark clouds to an already stormy outlook.

But TUI Travel, created through a merger of First Choice Holidays with TUI of Germany’s travel unit, should not be dismissed lightly. First, there are the £100 million-plus of merger synergies. Secondly, there is the chance to lift TUI’s margin of 2 per cent closer to First Choice’s 5 per cent. Given that Peter Long and Paul Bowtell, chief executive and finance director, respectively, are from First Choice, the chances of a rise in the margin are strong. Mr Long is respected for his skill in cutting capacity to fit demand, thus ensuring that he has fewer holidays left to shift in the cut-price lates market.

Yesterday’s proforma full-year numbers are largely irrelevant, being merely the crunching together of the two companies’ results. But they do highlight some of the challenges and opportunities. The £27 million of losses from TUI’s flight-only Thomsonfly business look ugly, but Mr Long reckons that these will be eliminated within three years.

Current trading is also strong, and summer bookings will be boosted by England’s eviction from the Euro 2008 football tournament. Consumer spending may slow, but TUI, which is set to join the FTSE 100 next week, is well-placed to ride the turbulence. However, at 273½p, down 9½p, the shares are trading at a full forward multiple of 16 times. There will be better times to buy.

Hunting

Six years after it sold its defence business to focus on oil services, Hunting has not escaped calls for further restructuring. The 20 per cent discount of the shares to its sector has revived suggestions that it should break itself up, splitting Gibson Energy, its Canadian tar sands operation, from Hunting Energy, which provides tubing and drilling equipment to oil and gas producers.

But attention returned to the strength of underlying trading yesterday as Hunting confirmed that it was on course to meet full-year profit forecasts. Given fears over the effects of a weak US dollar and earlier difficulties at its Moose Jaw refinery, that much provided relief and sent the shares 3 per cent ahead against a plummeting FTSE 250.

There were minor disappointments. Gibson’s marketing division was hurt by a fall in Canadian oil futures relative to spot prices and a lack of volatility between light and heavy crude prices. However, Hunting Energy performed well and should continue to do so, given expectations of a rise of up to 15 per cent in oil and gas sector capital expenditure next year. Increasing interest in oil sands also augurs well for Gibson.

However, Hunting’s problem is that forecast earnings growth of mid-single digits offers less excitement than the likes of Petrofac or Wood Group, which means that at 648½p, or 14 times next year’s earnings, its discount is likely to persist. Pass.

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