Although the defence sector is enduring a challenging period at the present time, with countries across the developed world continuing to implement spending cuts to their defence budgets, now could be a good time to buy a slice of BAE (LSE: BA) (NASDAQOTH: BAESY.US). That’s because, following a modest profit warning a year ago, it has seen a significant amount of momentum build and investor sentiment has improved substantially. For example, BAE’s shares are up 22% in the last year, while the FTSE 100 is up just 4%.
And, looking ahead, there could be more to come. That’s because, despite its rise, BAE still trades at a discount to the FTSE 100, with it having a price to earnings (P/E) ratio of 13 versus a P/E ratio of 15.9 for the wider index. Furthermore, with it forecast to increase its bottom line at a similar pace to the FTSE 100 over the next two years (at around 6% per annum), such a low rating may prove difficult to justify and could result in share price gains for BAE.
Shares in Meggitt (LSE: MGGT) are now back to their 2014 high, when the company was rumoured to be a bid target for US rival, United Technologies Corp. Of course, the bid did not materialise and Meggitt’s share price tumbled, with a profit warning also causing its value to decline as investors doubted the company’s ability to turn its fortunes around.
However, Meggitt seems to be doing just that, with its bottom line expected to rise by an impressive 17% this year, followed by a further 8% next year. And, with it trading on a P/E ratio of 15, this equates to a price to earnings growth (PEG) ratio of just 0.9, which indicates that Meggitt’s shares could reach higher highs during the course of the year.
Cobham (LSE: COB) also has a bright future ahead of it. That’s at least partly because it is relatively well-diversified, with it supplying the commercial aerospace sector as well as the defence sector. And, with the former offering strong levels of growth at the present time, Cobham is forecast to post a rise in earnings of 11% in the current year, followed by 6% next year.
In addition, with Cobham having a P/E ratio of 15.4, it trades at a modest discount to the FTSE 100. When combined with its growth forecasts, this equates to a PEG ratio of 1.4 and indicates that it offers growth at a reasonable price. Furthermore, with Cobham expected to increase dividends per share by 18% over the next two years, it could become a more appealing income play and see investor sentiment improve as it is forecast to yield as much as 3.7% in 2016.
Peter Stephens owns shares of BAE Systems. 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.