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Why Are BAE Systems plc And Cobham plc Climbing While Rolls-Royce Holding PLC Is Still In A Slump?

The aerospace and defence industry is very much a split one these days. On the one hand, we have BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US), which has been weathering the recession pretty well, keeping earnings per share going nicely and shelling out attractive dividends — the annual cash payout has been lifted each year with an expected yield of 4.4% this year, even after a healthy share price performance.

BAE’s long-term relationship with Saudi Arabia has helped a good deal, accounting for a full 20% of turnover in 2013 — and it’ll be high this year, too.

The shares have climbed by 83% since late 2011 to today’s 471p, and they’re still only on a P/E of 12 based on 2015 forecasts and dropping to 11.4 for 2016.

New high

Cobham (LSE: COB) has had an even better year than BAE, reaching a 52-week high of 334.9p on 9 January before dropping back a fraction to 332p as I write. Since late 2011 the shares have beaten BAE, too, having doubled. Dividend yields have been lower than BAE’s, so all in all the two companies have performed similarly for their shareholders.

Cobham is on a higher P/E rating, of 15.4 this year, but it has better earnings growth forecasts. The company released an upbeat update in November telling us that order momentum is good with cost reduction bearing fruit — and it’s been winning some nice contracts of late.

Profit warnings

But when we turn to poor struggling Rolls-Royce (LSE: RR) (NASDAQOTH: RYCEY.US) we see a different picture. Rolls-Royce shares had actually been ahead of the sector until late in 2013, after seeing EPS grow by 25% in 2011 and 23% in 2012. But a slip to a 10% rise in 2013 was below expectations, and the results were accompanied by a profit warning telling us there was unlikely to be any growth in sales or profits in 2014.

With optimism having pushed the shares to a year-end P/E of 19.4 the only way was down, and since then we’ve seen a 33% drop in the shares to 868p. The slide was hastened by a further profit warning in October which told us to expect a 3% fall in underlying profit in 2015 — the price fell 17% in the following days.

A way back?

But Rolls’ forecast P/E is now under 14 for this year and just 12.7 in 2016, with dividend yields at around 3%. A long-term bargain for recovery now? Could be, but with confidence shaken by profit warnings it’s hard to see the shares commanding a P/E up around 19 again soon.

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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.