BAE Systems plc Could Be Worth 824p

BAe SystemsAerospace and Defence stocks have been out of favour for some time now, with government spending still reined in after the recession.

But we’re heading further out of recession here in the UK with the USA showing upbeat economic figures, and Europe probably won’t be too far behind, so it really is starting to look like an undervalued sector to me.

BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) has been suffering along with the rest, and its earnings were very erratic over the past five years.

Modest fall

There’s a 6% fall in earnings per share (EPS) forecast for the current year, but that’s been due to delays in finalising the terms of the company’s Salam contract with Saudi Arabia — that’s been sorted now, and the lost EPS will just carry over to the next year.

The share price has suffered as a result, gaining just 26% over the past five years while the FTSE 100 has managed a rise of 55%. Still, at least BAE has almost kept pace with the FTSE over the past 12 months, managing 7% compared to the index’s 8% to reach 420p.

And BAE has been paying better dividends than average, with yields of around 5% being forecast.

But that does put BAE shares on a forward P/E of under 11 — its been lower than that in recent years, but with a good future ahead of it that looks too low to me.

Future value?

Anyway, what might BAE be worth in five years?

We’ve had estimates of EPS of 51p from 2018 annual results, and while that’s too far out to treat with any degree of confidence, we can still use it for “what if?” speculation.

Assuming a P/E strengthening to the FTSE’s long-term average of 14, we could be looking at a share price of 714p five years from now.

And what about those dividends?

We’d need to extrapolate dividend forecasts a little to reach 2018, but if we keep it in line with earnings forecasts we could end up with a cash sum of 110p to add to the pot.

How much?

Overall, then, a BAE share could be worth a total of 824p in another half a decade — and that would be just a shade short of double the current share price!

Reinvest the dividends in more BAE shares each year, and you’d more than double your money.

Will it really happen? Well, in BAE’s last full-year report, chief executive Ian King did say that “our strong order backlog and robust balance sheet provide a solid basis for growth over the medium term“.

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Alan does not own any shares in BAE Systems.