BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) gets my attention today, in my examination of the prospects for some of our top FTSE 100 companies in 2014.
Let’s start with a look at BAE’s performance over the past five years, with the latest consensus forecasts for this year and next:
| Dec | Pre-tax | EPS | Change | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | £2,371m | 37.1p | +23% | 14.5p |  | 3.8% | 2.6x |
| 2009 | £266m | 40.1p | +8% | 16.0p | +10% | 4.5% | 2.5x |
| 2010 | £1,409m | 39.8p | -1% | 17.5p | +9% | 5.3% | 2.3x |
| 2011 | £1,466m | 45.6p | +15% | 18.8p | +7% | 6.6% | 2.4x |
| 2012 | £1,369m | 38.9p | -15% | 19.5p | +4% | 5.8% | 2.0x |
| 2013(f) | £1,371m | 42.7p | +10% | 20.3p | +4% | 4.6% | 2.1x |
| 2014(f) | £1,348m | 42.0p | -2% | 20.9p | +3% | 4.8% | 2.0x |
An erratic few years
We see a bit of a crunch in 2009, but with payments for major contracts being irregular in the aerospace and defence business, profits on a year-by-year can be volatile. And by maintaining strong cover, BAE has been able to keep its dividends going nicely ahead of the FTSE’s average of around 3%.
Those 2013 forecasts were looking reasonably safe at the time of BAE’s third-quarter update in October, which told us that “Trading for the period has been consistent with management expectations at the time of the half-year results announcement on 1 August and the outlook remains unchanged“.
But since then, a hoped-for deal with the United Arab Emirates has fallen through, and a failure to agree pricing for a Typhoon contract with Saudi Arabia is set to knock 6-7p off EPS. So instead of that forecast 10% rise in EPS, we could be seeing a small fall instead.
But it’s really more of a delay than a loss, and I can’t see any long-term harm coming from it.
The share price
The BAE share price has performed poorly over the last five years, gaining only around 10% while the FTSE 100 has put on 45%. But over the past year, the picture is looking a bit better, with BAE shares up 22% compared to 12% for the FTSE.
But even after the gains of the past 12 months, BAE shares are still on a forward P/E based on 2014 forecasts of only 10, which is quite a bit below the FTSE average of around 14. Cheap? I think so.
At the end of 2011, when the shares were around their bottom, BAE’s P/E stood at an almost unbelievably low 6.3 even though that dividend stream was still flowing strong. Do you wish you’d bought some then? I wasn’t running the Fool’s Beginners’ Portfolio at the time, but I did add BAE Systems to it on October 2012 at a price of 332p — and we’ve seen a 30% gain since then.
Further to go?
At current valuations, I really can’t see BAE having anything but a positive 2014, and I’d be very surprised not to see that P/E strengthening over the year with a decent share price rise.
Verdict: Climbing higher in 2014