3 Defence Picks Ready To Blast Higher: BAE Systems plc, Avon Rubber plc And Senior plc

Royston Wild looks selects three stunning weapons builders set to surge: BAE Systems plc (LON: BA), Avon Rubber plc (LON:AVON) and Senior plc (LON:SNR).

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A backdrop of recovering economic conditions in the West and surging growth rates in emerging regions has given the aerospace and defence sector’s growth outlook a fresh shot in the arm. Indeed, IHS Jane’s Aerospace, Defence & Security Consulting expect global arms expenditure to rise to $1.547 trillion this year, up from $1.538 in 2013 and the first annual rise since 2009.

With this in mind I have selected three stock picks in great shape to ride the coming boom.

BAE Systems

Despite recent pressures on Western budgets, BAE Systems’ (LSE: BA) (NASDAQOTH: BAESY.US) wide range of market-leading products — from planes and tanks through to anti-cyber warfare systems — makes it a top-tier pick for the critical defence markets of the US and UK. Indeed, total sales rose 2% to £18.2bn last year, while its order backlog edged up to a chunky £42.7bn.

The business is also ramping up activity in high-growth developing markets, facilitated by dedicated teams in Saudi Arabia, India and Australia, and new orders from these geographies rang in at a hefty £9.3bn last year.

City analysts expect earnings to dip 4% this year before punching a 4% recovery in 2015. These projections leave BAE Systems dealing on P/E ratings of 10.2 and 9.9 for these years, camped around the value benchmark of 10 — any reading below this is generally considered terrific value.

As well, the firm also provides great value for income investors, with yields of 5% and 5.1% for 2014 and 2015 respectively smashing a forward average of 3.1% for the FTSE 100. The business is also returning up to £1bn through share repurchases up until 2016.

Avon Rubber

Combat mask builder Avon Rubber (LSE: AVON) is a critical supplier to the US armed forces, and noted last month that an improved order book had prompted a “substantially stronger first quarter performance” versus last year. The firm’s Project Fusion programme has delivered a steady stream of new products and innovations, which is also helping to drive non-US purchases skywards.

On top of this, the business is also a high-tech developer in the Dairy market, and orders of its milking devices are once again thriving following a difficult 2013, as strong demand in the US is complemented by rising sales in Europe.

Avon Rubber is expected to punch earnings growth of 5% and 8% for the years concluding 2014 and 2015 correspondingly, projections which create high P/E multiples of 16.9 and 15.7 respectively.  However, I reckon that Avon Rubber’s market-leading mask technology — combined with rising exposure to non-defence markets — justifies this premium.

Senior

I believe that Senior (LSE: SNR) is one of the frontrunners to enjoy surging demand for civil aircraft in coming years. The firm’s 2013 results released this week showed organic revenues at its commercial aerospace wing  advance 15% last year, a result which helped drive group turnover 6% higher to £775.1m.

Although the company witnessed further weakness in its military markets last year, this was more than offset by its large commercial aircraft division, an area responsible for 36% of total sales. Senior is witnessing rising demand for its products from planebuilding giants Boeing and Airbus, and with sales anticipated to gallop for these firms — collective deliveries advanced 7% last year alone — I expect Senior’s sale’s outlook to improve in tandem with that of its blue-chip customers.

City analysts expect Senior to post earnings expansion of 5% in 2014 and 6% in 2015, projections which produce P/E multiples of 14.7 for this year — matching the prospective average for the wider aerospace and defence sector — and which falls to 13.8 for 2015.

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 any of the companies mentioned in this article.

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