Year-on-year growth in earnings per share (EPS) at BAE Systems (LSE: BAE) (NASDAQOTH: BAESY.US) has been erratic over the past few years, and there’s a 10% fall to 38p forecast for the year ending December 2014.
But for a company like BAE, such short-term measures can be dangerously misleading — although investors can benefit by exploiting the dips.
It’s a long-term business
The real issues are the long-term nature of aerospace and defence contracts and the way that very large payments can be spaced out over considerable periods — after all, the way customers buy aeroplanes from BAE Systems can hardly be compared to the steady drip-like income from selling cabbages, clothes, or insurance.
For BAE, the EPS fall predicted for this year is, in fact, all down to the success it had in negotiating payment terms with the Kingdom of Saudi Arabia for its Salam contract for supplying Typhoon fighter aircraft. BAE secured some early payments in 2013, which were always going to relatively depress 2014 EPS should the deal prove successful.
Resilience
Comparing EPS forecasts with BAE’s recent history, the 40p per share being forecast for December 2015 is almost unchanged from the 40.1p recorded in 2009, which suggests to me that the company has been very resilient in the face of reduced defence spending during the economic slump, and it says good things about BAE’s potential for growth as we increasingly pull ourselves out of the slump.
At third-quarter time, reported at the end of September, we heard of order intakes of £7.9bn, including £2.6bn from non-UK/US markets, for the period — including a £348m contract by the UK Ministry of Defence to construct three new Offshore Patrol Vessels for the Royal Navy.
All in all, it was very much what we’d hope for from a company like BAE.
Future?
In the immediate term, next year’s forecasts of growth need to be considered against the background of short-term variation in annual earnings, but the long-term future for BAE looks good to me.
The shares are currently on a forward P/E of a modest 12, dropping to 11.5 on 2015 forecasts, and there are dividend yields of around 4.5% to be had this year and next. What’s more, those dividends should be about 1.9 times covered by forecast earnings. That’s a little less than the two-times and more of recent years, but it still look like a strong Buy signal to me.
