Why BAE Systems plc Is A Steal At Its Current Price!


The first part of 2014 did not get off to a great start for BAE (LSE: BA) (NASDAQOTH: BAESY.US) — one of the world’s leading defence companies — when it announced a profit warning. Following the profit warning, its shares fell sharply, although they have since recovered to trade at the same level as they were at the start of the year.

An Improved Strategy

Indeed, the profit warning has turned out to be less of a big deal than initially thought. Earnings per share (EPS) are forecast to fall by 6% this year, but BAE continues to make the necessary changes to its business in order to ensure it bounces back into growth next year. The latest such update came this week, when BAE announced a restructuring of its Saudi Arabian interests, with the company working more closely with partner, Riyadh Wings, as it seeks to stimulate growth in what is a highly lucrative market. Further changes are expected and it appears as though BAE is doing the right things in order to propel its bottom-line upwards.

A Super Yield – With Potential

Shares in BAE currently yield a highly impressive 4.8%. However, what makes BAE a great income stock is the potential for this figure to go much, much higher. That’s because BAE pays out only 52% of profit as a dividend, which is relatively low for a mature company operating in a mature sector. Indeed, BAE appears to be stable enough (even with the odd profit warning) to pay out up to three-quarters of profit as a dividend. Such a dividend would equate to a yield of 6.9% at current price levels.

Sector Peers

Of course, BAE isn’t the only great defence play available. Sector peers Rolls-Royce (LSE: RR), Meggitt (LSE: MGGT) and Cobham (LSE: COB) have their own attractions, too. For instance, although Rolls-Royce yields only 2.2%, it comes with strong growth potential — EPS is forecast to grow by 11% next year, with the company also set to deliver four consecutive years of earnings growth when it reports its current year results.

Meanwhile, Meggitt and Cobham also have above-average EPS growth forecasts for next year (+8% and +11% respectively) and have strong track records of earnings growth. Certainly, neither are as stable as a utility stock, for instance, but for investors who are seeking reasonable value, a decent yield and growth potential, they could prove to be long-term winners.

Despite this, BAE remains the pick of the sector at current prices. Of course, it’s not the only great stock in the FTSE 100 right now and that’s why The Motley Fool has put together a free and without obligation guide to our top 5 picks for the second half of 2014.

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Peter owns shares in BAE.