Today I am looking at why BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) should witness surging demand from developing regions.
New customers bolster order book
A solid budgetary backdrop in the critical US and UK marketplaces means that BAE Systems has vastly improved earnings visibility over the next year or so, a huge comfort given the turbulence following the 2008/2009 financial crisis. And over the long-term these countries’ improving economies should help to facilitate solid earnings improvement.
On top of this, the company can also look forward to accelerating sales in exciting new geographies, a phenomenon which has the potential to blast the bottom line sky high as emerging nations build up their armed forces.
Indeed, the arms giant announced just this week that it had secured a contract from the Mexican Navy to design and construct four 57mm Mk3 naval guns, with delivery scheduled between 2015 and 2017.
BAE Systems commented that the deal ‘further strengthens our strong position in the naval guns market,’ hardware which targets air, land and sea threats and is popular with new and existing customers alike — the technology has also been adopted in the US, Canada, Finland, Sweden and Malaysia.
The London-headquartered firm also announced this week that it had commenced weapons and avionics upgrades on two of South Korea’s F-16 fighter jets at its plant in Fort Worth, Texas. The work is part of a deal finalised back in December to upgrade 134 of the country’s planes under the US government’s Foreign Military Program.
Trade from emerging markets is becoming increasingly important for BAE Systems, facilitated by the company’s pan-global presence which has seen it establish major bases in the US, Saudi Arabia, Australia and most recently India. BAE Systems also has a network of business development offices spanning Europe, Asia and South America. In total the firm employs more than 88,000 people across the world.
These links are clearly paying dividends, and the defence specialist saw its order backlog rise to £12.3bn last year from £9.3bn in 2012, mostly owing to strong business from long-standing customer Saudi Arabia. With price escalation talks with the Middle Eastern Kingdom over the Salam Typhoon fighter plane contract now concluded, BAE Systems can look forward to fresh jet orders from its main non-Western customer in coming years.
