What’s Telling Me to Buy BAE Systems plc Today

Today I am looking at BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) and assessing whether the defence specialist carries enough firepower to ignite returns from my shares portfolio.

Perky orders underpin positive earnings outlook

Despite the impact of budgetary constraints in the West, BAE Systems saw group sales move 1% higher in the January-June period, to £8.45bn.

And promisingly, the business said that it expects a “significant anticipated trading bias” towards the second half of the year, underpinned by an expected conclusion to the protracted Salam Typhoon aircraft pricing negotiations with Saudi Arabia.

Last month’s results also revealed the company’s order backlog had continued to grow during the first half. Total backlog now stands at £43.1bn versus £40bn in the same 2012 period. And the company clocked up an order backlog of £4.8bn from non-US/UK customers, up from £4.3bn in January-June last year.

As well, BAE Systems is undergoing a significant cost-reduction and reshaping programme to give earnings an additional leg-up. In particular, the firm continues to strip out non-core assets — such as its Commercial Armored Vehicles subsidiary in the US, which was sold to The O’Gara Group in February — to help advance profits.

And despite the failed purchase of ship maintenance and repair specialist Marine Hydraulics International in July, I fully expect BAE Systems to remain extremely active on the M&A front as it seeks to stay ahead of its rivals on the tech battlefield and detonate stunning earnings growth.

A strong all-rounder at an outstanding price

Broker Investec expects earnings per share to rattle 11% higher this year, to 43.2p, before rising 1% in 2014 to 43.7p.

And despite recent jumps in the share price, BAE Systems still looks relatively cheap, recently trading on a P/E rating of 10.5 and 10.7 for this year and next. These figures are just above my value benchmark of 10 times prospective earnings, and represent a chunky discount to a forward average of 13.2 for the wider aerospace and defence sector.

Furthermore, the defence giant offers a much more attractive dividend story than those of its industry rivals, which currently boast an average prospective yield of just 2.4%. By comparison, BAE Systems offers a readout of 4.8%, based on Investec numbers, and which is expected to edge to 4.9% next year.

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> Royston does not own shares in BAE Systems.