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Chemring Group plc vs BAE Systems plc – Which Should You Buy?

baeAt one point this year, shares in Chemring (LSE: CHG) were up 29%. However, they have slipped back over the last four months and are now down 15% for the year. This is well behind the FTSE 100‘s performance over the same time period, with the index being up 1%. So, with shares seemingly offering better value for money, could now be a good time to buy Chemring? Or is BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) still a more attractive investment?

A Long-Term Turnaround

Half-year results released by Chemring this week showed that the company has a considerable way to go in its turnaround plan. Moreover, it has decided that a change in management is now required in order to put the company on a growth trajectory, with head of Chemring’s countermeasures business, Michael Flowers, taking over from Mark Papworth with immediate effect.

Of course, this comes after yet another set of disappointing results for Chemring, with the company increasing its losses to 37.5p per share for the half-year compared to 1.8p per share in the first half of 2013. However, Chemring is making progress with regard to its turnaround plan, with the company selling off its European munitions business so as to reduce debt and de-leverage the balance sheet. Furthermore, the challenges Chemring is experiencing in its countermeasures business are being somewhat offset by progress in sensors and electronics, as well as in energetic sub-systems.

A More Successful Peer

Meanwhile, sector peer, BAE, remains highly profitable. Despite being unlikely to meet initial guidance for the current year, BAE’s earnings per share (EPS) are expected to fall by a less than previously forecast at 6% this year, before increasing by 3% next year. In addition, BAE continues to be among the higher yielding shares in the index. It currently yields 4.8%, which is above and beyond Chemring’s yield of 2.7%.

Furthermore, BAE remains highly attractive at current price levels. Its price to earnings (P/E) ratio is just 10.8, which compares very favourably to the FTSE 100 P/E of 14.1, and the company appears to be far more stable (and profitable) than sector peer, Chemring. As a result, the choice over which one to buy seems obvious: BAE. Certainly, Chemring has the potential to turn itself around, but BAE is performing well now and remains undervalued, making it a potential winner over the medium to long term.

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Peter owns shares in BAE.