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Why BAE Systems plc Will Be One Of 2013’s Winners

Engineering firms had a tough time during the recession, but one that has come storming back and is on for a real winning 2013 is BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US).

At 443p today, BAE shares have soared 32% since the start of January, more than doubling the FTSE 100’s relatively puny 14% gain.

Growth and dividends

BAE looks pretty good on the dividend front. too, with a full-year yield of 4.5% forecast, nicely beating the FTSE average of 3.1%. And if the current consensus turns out to be accurate, it will be more than twice covered by earnings.

And even after a such a strong price rise, BAE’s shares are still on a forward price-to-earnings (P/E) ratio of only 10.5 based on full-year forecasts, and that’s a fair bit below the FTSE’s long-term average of around 14.

So do we have a share with some growth still to come, and with nice income thrown in too? I think so, and that’s why I added BAE to the Fool’s Beginners’ Portfolio in October last year — and we’re up 33% since then, even ignoring dividends.

The crowds were wrong

In fact, at the time I thought BAE was a great example of a very common phenomenon.

It was a company in a sector that is having a hard time — in this case defence and aerospace was expected to suffer from recession-led cutbacks — and so investors sell it off, but too strongly and the price falls way too far.

A P/E of around 7 or 8 in 2011-12 was stupidly cheap for a company that clearly had a good long-term future ahead of it.

Anyway, what are the prospects for the full-year?

Looking good

Well, in its third-quarter announcement on 10 October, BAE told us that trading was consistent with its half-time expectations and that its outlook remained unchanged — the key Salam project could lead to an impact on earnings per share (EPS) of 6-7p if it isn’t concluded buy year-end, but a satisfactory completion is anticipated.

At the end of the first half, reported in August, BAE saw a modest 1% rise in sales to £8,448m and a 4% drop in underlying EPS. But the firm still lifted its interim dividend by 2.5% to 8p per share, and told us it expects to record a double-digit rise in EPS when the year ends in December — and that’s slightly better than the analysts’ consensus.

What else is there to say?

Full-year results should be out on 20 February, and by then I’m sure we’ll have had a winning year from BAE.

And finally...

The engineering sector is not the only one that has had a successful year in 2013. No, the banking sector is also starting to come in from the cold, after a few years of "banker" being considered a dirty word. That's why we've produced the all-new "Motley Fool's Guide to Investing in Banks", which takes a look at the UK's top five.

Want to know which one would be best for your money? Click here to get your personal copy of the new report today.

> Alan does not own any shares mentioned in this article.