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

BAE Systems plc (LON: BA) is having a storming year.

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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.

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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.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

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