Fortunes in the defence industry have been somewhat varied and extreme, with BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) hitting a new 52-week high on Monday of 490.7p — as I write it’s down a couple of pennies to 489p. That’s 9% up over 12 months. Against a FTSE 100 that’s dropped nearly 5% it’s not a bad performance.
At the other end we saw QinetiQ (LSE: QQ) slumping to a 52-week low last week of 179p, before recovering a smidgen to 184p.
Why such different fortunes?
The resignation of QinetiQ’s chief executive, Leo Quinn, back in October (to be effective at the end of December) started a run of weak sentiment towards the company, with the share price shedding 12% on the day of the announcement — Mr Quinn apparently decided he prefers the challenge of getting Balfour Beatty back on track. And despite a short-lived rebound, the shares have carried on sliding and are currently 21% down over the past 12 months.
First half fine
A reasonable first-half update in November didn’t help much. Although organic revenue was down slightly, underlying operating profit was stable and underlying earnings per share (EPS) picked up a little — and the interim dividend was lifted 29% to 1.8p per share. Order intake was up, the ongoing £150m share buyback was 40% complete by mid-November, and the company was able to boast a high cash conversion rate.
EPS for the full year to March is expected to drop 11%, but analysts have modest rises pencilled in for the following two years. With forward price to earnings (P/E) ratios hovering around 12 and the dividend a decidedly average (although nearly thrice-covered) 3%, I don’t see a screaming bargain just now — investors can afford to take their time.
Bullish sentiment
Over at BAE investors are a fair bit more bullish, despite the shares being on similar P/E multiples — 13 for the year just ended, dropping to around 12 over the next two years. The dividend yield is higher at more than 4%, but it is nowhere near as well covered at only around 1.8 times. The current year’s EPS is expected to fall by a similar proportion as QinetiQ’s, though that’s partly due to its Typhoon contract with Saudi Arabia — the timing of payments favoured the previous year’s earnings.
But BAE’s strong relationship with the oil-rich Kingdom is one of its key strengths, helping it through tougher times in the Western defence business, and its order book is strong. BAE is also making the most of a depressed sector to make some nice acquisitions, and they should bode well for future profits.
The best?
In short, we seem to have two similarly-valued companies, but confidence in QinetiQ is understandably lacking a little at the moment while we await the appointment of a new CEO. And though its shares have performed better, I still like the looks of BAE Systems.
