Should I Buy BAE Systems plc?

BAE Systems plc (LON: BA) faces a tough battle in the face of US spending cuts, but that could make now a cheap time to buy its shares, says Harvey Jones

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I’m out shopping for shares again. Should I add BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) to my wish list?

The A to Z of BAE

Last time I looked at BAE Systems, in December, it had lost some of its firepower. Earnings per share (EPS) and sales growth were sluggish. Defence spending was under pressure, especially in the West. Competition in the Middle East was getting tougher. At least this meant you could buy it on the cheap at just 8.6 times earnings, and I was tempted. Should I buy it today?

BAE Systems has outgunned the market since then, rising 16% in the last six months and 32% over one year, against just 1.5% and 13% respectively for the FTSE 100 as a whole. Yet its recent half-year results were under-powered, with operating profit down 2.3% to £750m, and underlying EPS down 4%. Group sales rose just 1% to £8.45bn.

The outlook is a little brighter, with management anticipating double-digit growth in underlying earnings per share throughout 2013, but only if it successfully concludes price negotiations over Salam, the Kingdom of Saudi Arabia Typhoon aircraft purchase. The programme has been hit by delays and overruns. If it stalls now, investors won’t be happy.

Management sounds confident enough, and declared a 3% increase in the interim dividend to 8p. Right now, it yields 4.4%, covered two times, nicely above the average FTSE 100 yield of 3.5%, and the 2.2% average yield for the aerospace and defence sector. BAE has also been running a £1bn share buyback programme, which has helped to support the share price and keep investors happy.

Defensive investment

BAE is fighting back against mandatory cuts in Pentagon spending with £4.8bn worth of orders from outside the US and UK. Its order backlog is now worth £43.1bn, up from £40bn last year. Its balance sheet is strong and it pumps out cash. #

BAE is more expensive than it was last December, trading at 11.1 times earnings, but it is still cheaper than the index as a whole, currently at 15 times earnings. That could play now a buying opportunity for patient investors. Forecast EPS growth is 11% this year, but dips to 2% in 2014. Now is a solid enough time to invest, but I wouldn’t expect BAE Systems to be a high-flyer for a year or two.

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> Harvey doesn’t own any shares mentioned in this article.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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