3 Things That Say BAE Systems plc Is A Buy

BAe SystemsAerospace and defence has not exactly been a great growth business during the recession, which is really no surprise when governments are cutting the amount they spend on things that fly fast and things that go bang.

Look at BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) shares — they’re down 7% over the past 12 months to 422p and can’t even match a FTSE 100 that’s grown a mere 1%. But I reckon that makes them a bargain. Here’s why:

1. Short-sightedness

Yes, short-sightedness on the part of the markets helps make BAE Systems attractive to long-term investors.

There’s an 11% fall in earnings per share (EPS) forecast for this year, but even after that the shares are on a forward P/E of 11.4. And the thing is, in this business of very large contracts and paydays being very big but widely spread, year-on-year measurements are simply too fine-grained a comparison to mean much.

What we need is to be looking at BAE’s potential for profit growth over decade-long periods, not from this year to the next.

2. Strong future

Those looking further ahead can see what a company like this is really worth. With the firm’s last update in May, chief executive spoke of BAE’s “long-term, stable contracts in the maritime and military air sectors” in the UK, and of its year-end order backlog of £42.7bn (which included £9.3bn in international orders won last year).

Long-term orders worth £42.7bn! How little a few hundred million difference year-on-year really means compared to that!

3. Solid income

While the share price is motoring along at modest levels, BAE’s dividends have been rising ahead of inflation each year. Sure, there’s actually only a 1.3% rise forecast for this year to around 20.4p, but the mooted cash would still yield 4.8% on the current share price and would be 1.8 times covered by earnings — and that’s pretty good going in a short-term cyclical “down” year.

Overall, then, what I’m seeing is a share that is priced by institutional investors on the basis of short-term earnings volatility and subsequent year-end risk — and the next year-end position is the only thing that matters to many in the City.

But I see a nice opportunity here for those who can look past that to BAE’s long-term future.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.