A FTSE 250 stock I think should beat the BAE share price in 2019

The BAE Systems plc (LON: BA) share price has collapsed in 2018, but I think it could become one of 2019’s biggest winners.

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With the Footsie testing new 52-week lows almost every day, and many investors fleeing to the relative safety of blue-chip dividend stocks, we’re not hearing a lot about potential growth shares these days.

But if we ignore growth, we could be missing out on companies like James Fisher & Sons (LSE: FSJ).

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So far in 2018, shares in the marine services engineer have gained 13% while the FTSE 250 has lost 15%. And over the past five years, James Fisher shares have gained 37% — the mid-cap index has aded 11% in that time, while the FTSE 100 has been almost precisely flat.

There have been dividends on top of that, though yields are modest at a little under 2% as we might expect from a growth stock. Still, they’ve brought the total five-year return to more that 45%, which is exceptional in the current climate.

Submarine

On Wednesday the company announced a new contract worth £30m. Under the deal with Daewoo Shipbuilding & Marine Engineering, the firm will design and build a deep search and rescue vehicle for the Korean navy, with delivery expected by 2021. Training and in-service support are part of the agreement.

Chief executive Nick Henry said the contract “further demonstrates our position of market leadership in the submarine rescue market,” and that seems to me like a niche with significant barriers to entry for would-be competitors.

James Fisher shares are not on a screaming bargain valuation, with forward P/E multiples of around 20. But if the firm can maintain its long record of annual earnings growth, currently forecast at 5% per year this year and next, I can see it as a very good company at a fair valuation.

And though its dividends are modest right now, they’re strongly progressive and are growing at around 10% per year — and that could make it a cash cow in years to come.

Aerospace

Though it hasn’t enjoyed the same recent growth record, BAE Systems (LSE: BA) actually hasn’t been performing too shabbily. Earnings per share have remained pretty much flat over the past few years, but I see that as a sign that BAE has a defensive nature to its business and I think it’s a decent record in the current global economic climate.

By midsummer, BAE shares had been outperforming the FTSE 100 in 2018 with a decent gain. But since then, the price has slumped and now lags the FTSE with a 20% year-to-date drop (against 11.5% for the index).

That’s almost certainly down to fears caused by the increasingly pear-like shape of our Brexit negotiations, as tie-ups with European defence and aerospace firms could be under threat. But BAE sells most of its products to the Middle East, the US and the UK, and that makes me think Brexit fears are overdone.

Undervalued

The share price slump has dropped the valuation of the shares as low as a P/E of 10, and has pushed predicted dividend yields up to 5%.

The only thing that concerns me a little is net debt rising to £1.9bn at the interim stage at 30 June. But that’s still only around 10% higher than annualised EBITDA and well within what I see as a comfort zone. The intermittent nature of contract payments means I might wait for full-year results in February, but right now I think I’m looking at a strong buy.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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