3 Reasons Why BAE Systems plc Is Primed To Shoot Skywards

Royston Wild looks at the key factors which make BAE Systems plc (LON: BA) a fantastic stock selection.

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baeToday I am looking at why I believe BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) is a great addition to any investment portfolio.

Crimped budgets on the mend

A backdrop of lumpy earnings continues to bedevil the defence sector, and investors were spooked by BAE Systems’ full-year results released last week, particularly the company’s warning that:

Following last year’s non-recurring benefit from the Salam price escalation settlement, together with continuing US budget pressures, the Group’s reported earnings per share is expected to reduce by approximately 5% to 10% [this year] compared to 2013.”

Although recent pressure is indeed likely to persist in the medium term, I believe that a backdrop of improving economic conditions in the US and UK, and the consequent prospect of improved defence budgets, should push demand for BAE Systems’ products steadily higher in coming years. Indeed, a solid order book to the tune of £42.7bn — excluding a recent deal for the upgrade of South Korean F‑16 aircraft — pays testament to this.

Emerging markets provide exciting opportunities

Indeed, BAE Systems’ impressive stream of contract wins in new geographies such as South Korea should also assuage investor concerns over long-term earnings potential. The business chalked up a further £9.3bn worth of orders from non US and UK customers last year, while its long-standing relationship with the Kingdom of Saudi Arabia culminated in contracts worth around £6.4bn.

Crucially, BAE Systems also announced that it had finally forged an agreement with the Kingdom over the final cost of the sale of Salam Typhoon aircraft contract back in 2007. The firm cautioned in October that failure to hammer out a deal could hamper earnings by 6p to 7p per share, and this month’s accord has allowed both parties to enter negotiations for the sale of more aircraft.

Stunning value for both growth and income seekers

BAE Systems’ share price has obviously taken a bit of a hit since last week’s financial release, having dropped almost 6% in less than a week. In my opinion this makes the company’s already-compelling investment case too good to pass up.

Based on current earnings projections from City analysts, the defence giant is dealing on P/E ratings of 10 and 9.7 for 2014 and 2015 correspondingly, around the value watermark of 10 and blasting a forward average of 14.7 for the rest of the aerospace and defence sector.

On top of this, BAE Systems is also an exceptional pick for those seeking chunky income prospects. The company is expected to lift last year’s 20.1p per share dividend to 20.9p and 21.5p in 2014 and 2015 respectively, figures which create gargantuan yields of 5.1% and 5.2%. As well, BAE Systems has also dedicated up to £1bn in share repurchases until February 2016.

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.

> Royston does not own shares in BAE Systems.

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