Although the FTSE 100 has done little more than tread water in 2014, its performance has been significantly better than that of BAE (LSE: BA) (NASDAQOTH: BAESY.US). It is currently down around 8% year-to-date, as the company released a profit warning in February that sent shares down over 10%. However, shares have shown strength of late, gaining over 6% in just three weeks and the recent update from the company showed that full-year expectations are unchanged. Could BAE continue to make gains and deliver improved growth in future? Will it ever be classed as a super growth stock?
Future Growth Prospects
As mentioned, BAE released a profit warning in February and, as such, earnings per share (EPS) for the current year are forecast to be 5% below those recorded in 2013. However, looking beyond the current year highlights that BAE looks set to be able to return to growth immediately, with the company forecast to grow EPS by 3% in 2015 and by 4% in 2016.
Although below the FTSE 100’s forecast growth rate of between 4% and 7% over the same time period, BAE’s growth forecasts are nevertheless a significant improvement on the current year. Furthermore, BAE is a company that has rarely delivered consistent bottom-line improvements, with EPS being volatile in previous years, although following a generally upward trend. As such, further ups and downs should be expected and they appear to ‘come with the territory’ of investing in a defence stock such as BAE.
Growth At A Reasonable Price
Where BAE offers potential, though, is in terms of its current valuation. Certainly, the profit warning in February was a disappointment, but BAE remains one of the major players in what is a highly lucrative industry and, furthermore, it offers investors a well-run company that has strong fundamentals (low debt, strong cash flow, a decent dividend of 5.2%) at a relatively attractive price.
While the FTSE 100 currently trades on a price to earnings (P/E) ratio of 13.6, BAE’s P/E is just 9.5 – a discount of 30% to the wider index. Therefore, although growth prospects are volatile and slightly below the index average, BAE continues to offer good value when its fundamentals are taken into account. As such, although it may not be a super growth stock, BAE still appears to be a super investment for medium to long-term investors.
