The Aerospace and Defence sector is a small one, but it contains some venerable companies.
Continuing our perusal of the sectors of the FTSE, we turn to Aerospace and Defence. It's only a small sector, with just a few constituents, but there are some big companies with impressive histories.
The table below contains all of the Aerospace and Defence companies on the FTSE main list. For once, there are no small AIM companies that pass our market capitalization requirement of £50m.
| Company | Index | Market cap
£m | Turnover
£m | Year End |
|---|
| BAE Systems (LSE: BA) | FTSE-100 | 10,851 | 20,374 | Dec 2009 |
| Rolls-Royce Group (LSE: RR) | FTSE-100 | 10,494 | 10,414 | Dec 2009 |
| Cobham (LSE: COB) | FTSE-100 | 2,582 | 1,880 | Dec 2009 |
| Meggitt (LSE: MGGT) | FTSE-100 | 2,154 | 1,151 | Dec 2009 |
| Ultra Electronic Holdings (LSE: ULE) | FTSE-250 | 1,072 | 651 | Dec 2009 |
| Chemring Group (LSE: CHG) | FTSE-250 | 1,045 | 504 | Oct 2009 |
| QinetiQ Group (LSE: QQ) | FTSE-250 | 820 | 1,625 | Mar 2010 |
| Senior (LSE: SNR) | FTSE-250 | 494 | 540 | Dec 2009 |
| Umeco (LSE: UMC) | All Share | 193 | 409 | Mar 2010 |
| Hampson Industries (LSE: HAMP) | All Share | 142 | 178 | Mar 2010 |
Sector leader
Heading the list we have BAE Systems. Formed by a merger of British Aerospace, Marconi Electronics Systems, and the defence division of GEC, BAE today contributes to a number of major defence projects, including the development and production of aircraft and submarines, including the Eurofighter.
Coming from a couple of years of strong growth, pre-tax profits fell 40% to £1.4bn in 2009 on a turnover in excess of £20bn, but a £2bn profit is expected this year.
BAE pays steady dividends (a yield of around 5.5% is expected this year) which are well covered by earnings, and carries no debt. With a prospective P/E of little more than 7 for 2010, it looks like a serious investment candidate.
Roll-Royce Group, makers of aeroplane engines and other power systems, doesn't look as cheap but arguably has a better underlying trading record. Profits of £900m are expected this year, putting it on a prospective P/E of around 14 and an expected dividend yield of around 3%.
Much of a muchness
Originally formed as Flight Refuelling Limited by Sir Alan Cobham in 1934, Cobham operates in a number of aerospace and defence fields, including avionics, communications and, air-to-air refuelling systems.
After a dip in 2008, Cobham saw its profits almost double the following year, and a further 20% rise is expected in 2010, to around £310m. Dividends are well covered, but amount to less than 3%, with the prospective P/E coming in around 10.
Meggitt, making a wide variety of aerospace and defence products and based at Bournemouth airport, started life as Wilson Lathes in Halifax. Through a history of acquisitions, Meggitt today produces aircraft braking systems, fluid controls, and safety systems, amongst other projects.
Meggitt fits in with the picture that is beginning to arise, of a well-covered sub-3% dividend and a P/E just over 10. Meggitt carries a little more debt than others -- the £800m on its books at the end of 2009, while not worrying, is a significant fraction of its £2bn market capitalization.
Ultra Electronics has had a more erratic past few years than most, slumping to a pre-tax loss in 2008 before rebounding to new heights in 2009 with over £100m in profit. Flat forecasts for this year and next put the shares on a heady P/E of 14, again with the familiar unimpressive but well-covered dividend, this time little more than 2%.
Breaking the mould
Chemring, breaks the mould of up-and-down earnings and a volatile share price, after five straight years of profits growth, and with 2009 showing a £100m pre-tax profit from a £500m turnover. OK, we've got the usual low dividend, this time 2%, and a middling P/E of 11, but anyone who bought the shares a few years ago will have done very well indeed.
Of the remaining smaller companies in the sector, nothing looks especially attractive. QinetiQ and Umeco are both offering dividend yields of over 4% on P/Es of about 10, but both are carrying debts of around half their market caps. Senior looks pretty much like the rest of the sector, and Hampson Industries has seen a share price slide and debts that have risen to exceed its market cap.
Overall, this initial perusal has shown a fairly uninspiring sector for an investor, with two possible exceptions. Chemring has clearly been the success story of recent years, but the best future prospect may well turn out to be BAE Systems, whose decent dividend, low P/E, and lack of debt make it one to watch. But as ever, do your own research -- and tell us what you think, below.
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