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Are BAE Systems plc, Rolls-Royce Holding PLC And Meggitt plc Set For A Bumper 2015?

The aerospace and defence sector came under pressure during the recession as government budgets were cut back, but we could well be heading for a turnaround year for the FTSE 100‘s big three.

In fact, BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) has already been enjoying a rebound, with its shares up 24% to 467p since their low point in April. BAE has actually beaten the FTSE over five years, while paying above-average dividends.

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Full-year results are due on 19 February, and there’s an 11% fall in earnings per share (EPS) forecast. But that’s mainly due to favourable settlements in the firm’s Typhoon contract with Saudi Arabia having given last year’s earnings a boost, such is the nature of payments for multi-year deals.

Big order book

By the halfway stage in June, BAE had an order backlog of £39.7bn and reported flat underlying earnings per share — and the dividend was lifted 2.5% to 8.2p. At the time, BAE had a net £1.2bn in cash on its books too. Then at Q3 time the firm reported total new contracts for the nine months of £7.9bn, so the work is still piling in.

What we’re looking at is a cash-rich company on P/E multiples of around 12, paying well-covered dividends yielding more than 4%.

Things haven’t gone so well at Rolls-Royce Holdings (LSE: RR) (NASDAQOTH: RYCEY.US), whose shares are down 28% over the past 12 months to 865p after several profit warnings — the last downgrade in October told us to expect a 3.5% to 4% fall in 2014 underlying revenue.

Then in November, Rolls said it was stepping up its cost-reduction efforts, telling us its restructuring costs would knock around £60m off underlying profit this year and next.

New orders

But since then the company has been winning new orders, with a $5bn, 50-aircraft order from Delta Air Lines coming on 21 November, and an additional $450m in business from Finnair snagged on 3 December. And after completing the sale of its energy gas turbine and compressor business to Siemens, the company announced a $1bn share buyback programme.

With the shares on a forward P/E of under 14, turnaround time for Rolls-Royce might have come sooner than expected. Results are due on 13 February.

At Meggitt (LSE: MGGT), we’ve seen a flat year overall with the shares at 550p. There’s a 17% fall in EPS forecast for this year, but contract changes have pushed some expected revenue back into 2015 — and that should bring a sharpish 15% recovery to put the shares on a forward P/E of 14.

Military recovery

In its last update in November, Meggitt was sounding pretty optimistic. Organic revenue grew 5% in the third quarter, with original equipment sales in civil markets up 18% (and civil aftermarket sales up 4%). Crucially, military sales rose 5% too. The growth rate is expected to fall back a little in Q4, but the scene looks set for a potentially fruitful 2015.

I reckon all three of these companies are looking attractive now, especially BAE.

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

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