Due to the nature of payments for large contracts and the time they can take to develop, profits at aerospace and engineering companies like BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) can be a bit erratic year-on-year.
As an example, the timing of the conclusion of last-year’s contract negotiations related to the company’s Salam contract with Saudi Arabia made a difference to reported earnings per share (EPS) for the two years, and that will contribute to an expected drop in EPS of 5-10% this year.
Longer-term stability
Over the longer term, though, BAE’s underlying EPS figures have been remarkably strong during the last few tough years, enabling the firm to steadily lift its annual dividend. Investors were rewarded with a 4.6% yield last year, and based on the current 425p share price there’s a 4.9% yield forecast for this year.
Against that background, what should we expect from BAE’s first-half results, due to be presented to us on Thursday 31 July?
Judging by May’s pre-AGM update, we should expect reined-in US defence spending to continue to put pressure on profits. But it seems that BAE’s expectations were pretty much spot-on, with chief executive Ian King speaking of “a more predictable outlook than we have seen in recent years“.
UK looking good
In the UK, he told us, “our business continues to benefit from long-term, stable contracts in the maritime and military air sectors“, with a strong order backlog providing good visibility. That backlog stood at £42.7bn at 2013 year-end, with a contribution of £9.3bn coming from international business during the year.
Capital requirements can fluctuate in this industry, and Mr King reminded us that BAE has a conservative approach to its balance sheet “consistent with the policy to retain an investment grade credit rating and to ensure operating flexibility“.
With that in mind, the company’s share buyback programme reflects strong confidence from the board — the programme, started back in February 2013, had acquired 104 million shares for a total of £429m by 6 May 2014, with £217m of that spent since 1 January.
No big changes
In the light of what we already know, then, the first-half report really should not contain any surprises, and we should be hearing of a performance very much in line with the outlook presented to us with 2013’s full-year figures in February. Revenues across the company’s divisions should be largely in line with last year’s, with the exception of a fall in US Platforms and Services.