The last two years have seen very different fortunes for shareholders of aerospace engineers BAE Systems (LSE: BA) and Rolls-Royce Holdings (LSE: RR), with BAE gaining 26% up until the close of play yesterday, while Rolls-Royce had lost 30%. But both gained today after releasing interim figures.
Strengthening demand
BAE’s shares are up a modest 1% at the time of writing, to 545p, after the company reported a 3.5% rise in first-half revenue to £8,278m, with underlying EBITA up 6% to £849m (3% on a constant currency basis). Underlying earnings per share gained 2% to 17.4p and the interim dividend was lifted by 2.4% to 8.6p per share, suggesting the forecast full-year yield of 3.9% is still on the table.
Chief executive Ian King said: “Despite economic and political uncertainties, governments in our major markets continue to prioritise national security, with strong demand for our capabilities,” pointing to signs of a return to growth in US defence budgets. And that’s backed up by BAE’s impressive order book, of £36.6bn. On Brexit, Mr King admitted there will be uncertainty now, but said that “we do not anticipate any material near-term trading impact on our business“.
For the full year, BAE expects underlying earnings per share to be between 5% and 10% ahead of last year, which is more attractive than the reported 3% drop currently forecast by the City’s analysts.
All in all, this is a very encouraging start to the year. With the shares on a forward P/E now of 14, dropping to 13 on 2017 forecasts, and with dividend yields of around the 4% mark, I see BAE Systems as a solid long-term buy.
Winds of change
Despite an 80% drop in underlying first-half profits at Rolls-Royce, to £104m, the company’s shares soared by 16% in the first two hours of trading, to 845p. The profit fall was in line with expectations, and the markets are clearly encouraged by the words of chief executive Warren East. He said “the business remains well positioned to deliver a solid second-half performance supported by growth in engine deliveries, stronger aftermarket revenues and incremental benefits from our on-going restructuring programmes“.
Confidence in the firm’s turnaround strategy, after a series of profit warnings sent the shares into tailspin, seems to be growing. Rolls-Royce’s plan, announced in November 2015, aims to deliver savings of between £150m and £200m per year, and should come to full fruition by the end of 2017. Simplification of the company’s senior management structure is one of the aims, with 400 management jobs lost in the half.
The company cut its first-half dividend to 4.6p per share, from a 2015 interim payment of 9.27p, but the intention had already been announced in February so there was no surprise there. I reckon that’s still generous, and a full suspension of this year’s dividend while costs are being pared would have been justified. But it’s probably aimed at reassuring shareholders that dividends will be maintained in the long term.
I reckon Rolls-Royce probably needed this shock to get itself into a leaner position for a stronger long-term performance, and it’s bearing fruit. The shares’ short-term valuation looks stretched on a forward P/E of more than 30, but that’s based on low transformational profit levels, and a few years from now I expect we’ll see this was a buying opportunity.
