Today I am looking at the near-term earnings prospects for defence colossus BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US).
A great long-term earnings option
News in December that US Congress had finally concluded its long-running sequestration impasse, a move which lifted 2014 defence spend to $520.5bn, was music to the ears of arms builders across the globe.
BAE Systems’ industry-leading tech across many sub-sectors has enabled it to keep contract wins with the US and UK rolling — bucking fears over slashed expenditure and lumpy order timelines — and stabilising defence spend and signs of a broader economic recovery for its single biggest customer cannot be underestimated for the firm’s earnings outlook.
Indeed, BAE Systems’ importance as a heavy-hitter in the American and British defence programmes was underlined last week when it announced plans to recruit a record 568 apprentices this year — up from 387 in 2013 — in order to meet “the largest workload for two decades” across its submarine-building operations in the UK.
On top of bubbly business from its traditional customers, BAE Systems can also look forward to rising activity in new markets. The company received a mild body blow last month when it failed to secure a contract with the United Arab Emirates for the sale of its Typhoon fighter jets.
Still, sales to non-Western clients continue to climb — indeed, orders leapt 12% alone to $4.8bn during January-June — and a $1bn contract inked with South Korea last month to upgrade the nation’s F16 planes underlined its exceptional record of winning new customers.
The effect of lasting pressure on Western government budgets since the 2008/2009 financial crash has seen BAE Systems’ earnings performance fluctuate in recent years, and City analysts expect this trend to continue over the next 12 months. Following an expected 10% earnings improvement in 2013, to 42.7p per share, a 2% decline is pencilled in for 2014 to 42p.
Still, this year’s earnings forecast still leaves the firm dealing on a more-than-reasonable P/E rating of 10.4, just above the value benchmark of 10 and blowing a prospective average of 14.7 out of the skies. In my opinion a backdrop of easing budgetary pressure in the West, combined with rising activity in exciting new growth areas, makes it a great long-term growth selection.