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3 Great Reasons Why BAE Systems plc Is Set To Take Off

Today I am looking at why I believe BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) is an attractive investment option for stock market investors.

Explosive sales potential in foreign climes

BAE Systems continues to make significant headway in new territories, a crucial point given that constrained budgets in the West are likely to weigh on the top line moving forwards. The business saw orders from non-US and UK customers hit £4.8bn in January-June, a £500m rise from the same period in 2012.

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In particular, BAE Systems is a major supplier to Saudi Arabia, and during the period inked a £600m weapons contract under the Saudi British Defence Co-operation Programme, as well as a £1.8bn deal for follow-on support for the Salam Typhoon aircraft, due to run until 2017.

The company is also banging the drum over its sales potential exciting new geographies — indeed, the firm highlighted ‘significant opportunities to secure future Typhoon export contracts‘ to the United Arab Emirates and Malaysia in August’s half-year report, for example.

Impact of reduced US spend overstated?

As I have explained, the impact of reduced expenditure from the US continues to weigh on the firm’s revenues outlook. And although prospects from this region remain meagre for the short to medium term, many believe that the company is now over the hump in this regard.

Broker Investec reckons that, excluding commercial sales and FMS exports, total US government spending will account for around 36% of BAE Systems’ sales in 2013. Given these figures, in the event of a theoretical 10% sequester cut transpiring in the States, this would result in a 3.5% dip in total revenues. Although a greater profits dip would materialise under this scenario, the effect would still remain manageable for the firm.

An enviable cash generator

BAE Systems has an extremely robust balance sheet and saw its cash pile explode over the past 12 months — indeed, free cash flow more than tripled in 2012 to just over £3bn.

Current cash strength leaves the defence giant in an extremely strong position on the merger and acquisition front, a trail which BAE Systems has been extremely active on in recent times. And the weighty cash position also leaves investors confident that its progressive dividend policy is in good shape to keep on rolling even in the event of earnings pressure. Payouts of 20.28p and 20.75p are predicted by City analysts for 2013 and 2014, up from 19.5p last year.

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> Royston does not own shares in BAE Systems.

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