The performance of the FTSE 100 has been relatively disappointing in 2018. It’s trading at a similar level to which it started the year. For long-term investors though, this could present a buying opportunity, with UK share prices seemingly offering good value for money at the present time.
One stock which could perform well in the long run is defence company BAE (LSE: BA). It appears to offer a mix of value for money and growth potential. As such, it could be worth buying alongside a smaller stock which reported positive results on Wednesday.
Improving outlook
The company in question is advanced computer vision technology specialist Seeing Machines (LSE: SEE). It reported a rise in revenue in its financial year of 117%, with its top line reaching A$30.7m. Its Fleet division’s revenue increased by 89%, while Automotive revenue increased five-fold. It was able to secure production awards in the year to 30 June, with two premium German automotive original equipment manufacturers (OEM), as well as one global US-based OEM for multiple vehicle models in the 2019 to 2022 timeframe.
The company is seeking to transform the business model of its Fleet division in order to improve the deployment of capital and resources across the group. It is also seeing increasing demand from the global automotive sector for its driver monitoring system (DMS) technology.
As such, Seeing Machines could enjoy a tailwind over the medium term. DMS technology looks set to play a greater role in the transport sector, with autonomous driving and safety likely to be key growth areas in future years. While the company may be relatively risky and volatile, its long-term investment prospects appear to be improving.
Growth potential
The outlook for BAE and the wider defence sector has improved significantly in the last few years. Higher spending on the military by the US and an end to austerity across much of the developed world means that the financial prospects for defence companies across the globe could be boosted. This may lead to rising bottom lines and higher valuations.
With a price-to-earnings (P/E) ratio of around 16, BAE doesn’t appear to be excessively priced at the present time. The company is forecast to post a rise in earnings of around 9% in the next financial year, and this could help to stimulate investor demand for its shares. And with it yielding 3.7% from a dividend that is covered 1.9 times by profit, its total return potential seems to be high.
BAE is focused on driving through efficiency gains over the medium term. It is also seeking to advance and further leverage its technology in international markets, as well as adjacent markets. Its position as a major supplier across a number of segments means that it may be well-placed to identify new growth opportunities. Therefore, it could benefit significantly from global GDP growth and the return to higher military spending which seems likely to take place over the coming years.
