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Why BAE Systems plc Provides Outstanding Bang For Your Buck

In this article I am explaining why I believe BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) is a spectacularly priced stock pick.

Price to Earnings (P/E) Ratio

As the fallout of the 2008/2009 banking crisis severely crimped government spending in the West, the global defence sector was baeforced to endure an environment of vast revenue reductions and lumpy contract orders.

And although a backdrop of improving economic conditions has given the sector’s outlook a much-needed shot in the arm, the effects of the crisis continues to hamper BAE Systems’ growth story, and the firm is expected to punch a 6% earnings decline in 2014. A modest 3% rebound is anticipated in 2015.

Still, these earnings forecasts create P/E readouts of 10.8 and 10.5 for 2014 and 2015 respectively, just outside the benchmark of 10 times or under which is generally classified as terrific value. In addition, BAE Systems also deals at a discount to the broader aerospace and defence sector which carries a forward average of 14.7.

Price to Earnings to Growth (PEG) Ratio

Still, BAE Systems’ expected earnings dip this year fails to create a valid PEG rating. And 2015’s discreet improvement — although a step in the right direction — spawns a readout of 3.4, falling outside the bargain terrain of 1 or below.

Market to Book Ratio

BAE Systems’ book value, after deducting total liabilities from total assets, rings in at around £3.4bn. This creates a book value of £1.05 per share, which in turn produces a market to book ratio of 4.1. This flies well above the textbook value yardstick of 1.

Dividend Yield

Even though BAE Systems has seen earnings oscillate wildly in recent years, and current forecasts indicate further volatility ahead, the company’s huge cash pile is expected to keep dividends moving higher. Indeed, brokers expect last year’s full-year payout of 20.1p per share to advance to 20.5p in 2014 before rising to 21p next year.

These projected dividends create sizeable yields of 4.8% and 4.9% respectively, taking out a prospective average of 3.2% for the FTSE 100 and annihilating a corresponding readout of 2.5% for the aerospace and defence space.

An Explosive Value Pick

In my opinion, BAE Systems is a fantastic stock selection for those seeking stellar growth and income prospects at reasonable prices. With improving economic conditions in the US and UK — responsible for the lion’s share of the company’s orders — primed to support resurgent defence spend, and hardware demand surging from new clients in emerging regions, I believe that the defence leviathan’s broad suite of products should underpin solid earnings and dividend growth well into the future.

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Royston does not own shares in BAE Systems.