The aerospace and defence sector came under pressure during the recession as government budgets were cut back, but we could well be heading for a turnaround year for the FTSE 100‘s big three.
In fact, BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) has already been enjoying a rebound, with its shares up 24% to 467p since their low point in April. BAE has actually beaten the FTSE over five years, while paying above-average dividends.
Full-year results are due on 19 February, and there’s an 11% fall in earnings per share (EPS) forecast. But that’s mainly due to favourable settlements in the firm’s Typhoon contract with Saudi Arabia having given last year’s earnings a boost, such is the nature of payments for multi-year deals.
Big order book
By the halfway stage in June, BAE had an order backlog of £39.7bn and reported flat underlying earnings per share — and the dividend was lifted 2.5% to 8.2p. At the time, BAE had a net £1.2bn in cash on its books too. Then at Q3 time the firm reported total new contracts for the nine months of £7.9bn, so the work is still piling in.
What we’re looking at is a cash-rich company on P/E multiples of around 12, paying well-covered dividends yielding more than 4%.
Things haven’t gone so well at Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US), whose shares are down 28% over the past 12 months to 865p after several profit warnings — the last downgrade in October told us to expect a 3.5% to 4% fall in 2014 underlying revenue.
Then in November, Rolls said it was stepping up its cost-reduction efforts, telling us its restructuring costs would knock around £60m off underlying profit this year and next.
New orders
But since then the company has been winning new orders, with a $5bn, 50-aircraft order from Delta Air Lines coming on 21 November, and an additional $450m in business from Finnair snagged on 3 December. And after completing the sale of its energy gas turbine and compressor business to Siemens, the company announced a $1bn share buyback programme.
With the shares on a forward P/E of under 14, turnaround time for Rolls-Royce might have come sooner than expected. Results are due on 13 February.
At Meggitt (LSE: MGGT), we’ve seen a flat year overall with the shares at 550p. There’s a 17% fall in EPS forecast for this year, but contract changes have pushed some expected revenue back into 2015 — and that should bring a sharpish 15% recovery to put the shares on a forward P/E of 14.
Military recovery
In its last update in November, Meggitt was sounding pretty optimistic. Organic revenue grew 5% in the third quarter, with original equipment sales in civil markets up 18% (and civil aftermarket sales up 4%). Crucially, military sales rose 5% too. The growth rate is expected to fall back a little in Q4, but the scene looks set for a potentially fruitful 2015.
I reckon all three of these companies are looking attractive now, especially BAE.