BAE Systems plc Leads Aerospace Recovery

rollsroyceWith the news that BAE Systems (LSE: BAE) (NASDAQOTH: BAESY.US) has won a new £348m contract for the supply of three offshore patrol vessels, could we be seeing a glimmer of light in the darkness of the aerospace and defence industry?

The new deal will bring construction work to BAE’s Govan and Scotstoun shipyards on the Clyde, and comes after four years of defence cuts and the controversial orders for two new aircraft carriers, one of which may never be used by the Royal Navy.

But things could be looking up, after Defence Secretary Michael Fallon said “This multi-million pound contract shows our commitment to investing in new ships for the Royal Navy and maintaining in the UK the expertise needed to build the warships of the future“.

Order backlog

At first-half time, BAE said that its order backlog stood at £39.7bn, and told us of further commitments from the UK government for Typhoon aircraft development.

Rolls-Royce Holdings (LSE: RR) has been picking up steady orders, too. Despite the termination of an Airbus order that would have been worth £351m (0.5% of the firm’s order book),  things are generally looking up with orders coming from International Airlines Group, Hawaiian Airlines, Transaero Airlines, Air Mauritius, AirAsia X, United Airlines, Kuwait Airways and several leasing companies in just the past four weeks.

The Rolls-Royce share price took a tumble in February when 2013 full-year results came in lower than expected, but forecasts for a return to earnings growth by 2015 are looking realistic.

Modest optimism

Over at Meggitt (LSE: MGGT), interim results released on 5 August were encouraging. Although revenue and profits were down a bit, orders in the half were up by 9% , and the company told us that its good order intake across all its end markets bodes well for growth in the second half.

Full-year expectations were downgraded a little, however, and the share price has slipped to 471p for a 12% loss over 12 months. But again, we have a fall in earnings forecast this year followed by a recovery in 2015.

Over in the US, defence firms General Dynamics and Northrop Grumman have both lifted their 2014 forecasts even though US defence spending remains low, after the two reported better-than-expected second-quarter figures last month. The boosts were largely due to better cost control, but the whole sector is looking lean and fit now and ready to profit when defence spending recovers.

Best in the business

Of the FTSE 100 operators in the sector, BAE remains my firm favourite on its fundamental valuation. Although the share price has picked up a bit in the past few months, it’s still down a couple of percent over a year to 430p.

We’re also looking a a modest forward P/E of 11.5, dropping to 11 based on 2015 forecasts. And with a decently covered yield of 4.8%, the expected dividend is the best in the sector.

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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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.