Why I Think BAE Systems plc Is A Strong Buy

BAE (LSE: BA) (NASDAQOTH: BAESY.US) is a company that I think offers tremendous value for money and, as such, I’m thinking of adding to my shareholding.

Indeed, BAE trades on a price-to-earnings (P/E) ratio of just 10.6, which on an absolute basis is dirt cheap. Whether the FTSE 100 was on a P/E of 5 or 15, I would still be of the view that a P/E of 10.6 is cheap for BAE, given the quality of the company.

However, the fact that BAE trades on a significant discount to both the FTSE 100 and to its industry group (industrials) makes me even keener to buy shares in the company. Indeed, the FTSE 100 has a P/E of just under 16, while the industrials industry group has a P/E of over 23. Why BAE trades on a P/E of less than two-thirds of the index and less than half its sector is rather puzzling to me, given the company’s diverse operations and track record.

Furthermore, BAE’s chart also leads me to believe that the future could be prosperous for shareholders. BAE has delivered huge outperformance of the wider index in 2013, with shares gaining 35% while the FTSE 100 has increased by just 14%.

Clearly, investor sentiment is positive on BAE and this seems to have continued throughout the calendar year, with the divergence between the performance of BAE’s shares and the wider index becoming greater as the year has progressed.

Of course, shares have flat lined in recent weeks, which I think gives investors a great opportunity to buy while shares have come off slightly from their highs. To me, the prospects for the company seem to be positive and market sentiment seems to be with the business, making now a good time to buy.

In addition, shares offer a yield that is well above the market average of 3.4%. BAE currently yields 4.5% and this income is of great benefit to income-seeking investors like me. With inflation being a continual threat and bank account savings rates being so poor, 4.5% from BAE shares provides a tidy sum every year to either reinvest in shares or spend.

However, despite being a great yield play, BAE is not top of the income stock pile at Motley Fool HQ.

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> Peter owns shares in BAE.