Why The Tipsters Like BAE Systems plc Better Than Rolls-Royce Holding PLC, Meggit plc And Cobham plc

The aerospace and defence business has had a mixed year. BAE Systems (LSE: BA) shares are up 32% over the past 12 months to 535p against a feeble 3% for the FTSE 100, but its fellows in the sector aren’t doing so well.

Meggitt (LSE: MGGT) hasn’t actually done badly with a 19% rise to 552p, but Cobham (LSE: COB) has only just managed to beat the index with a 4% gain to 316p, and Rolls-Royce Group (LSE: RR) has famously fallen 5% to 983p after shocking the market with no sales or profit growth in 2014 and a fall in EPS forecast for this year.

Cheap shares

Even after its rise, I reckon BAE still looks like a bargain. In fact, it’s on the lowest forward valuation of the lot and has attracted a bullish set of analysts’ recommendations. Based on forecasts for 2015, BAE shares trade on a P/E multiple of 13.6, dropping to 12.7 for 2016 — and that’s with dividend yields of 3.9% and 4% expected. Nine of the tipsters are lined up behind a Buy recommendation with six urging us to Sell and seven on the fence.

At Meggitt we’re looking at five Buy recommendations against three Sells, but there are nine Neutrals too so that’s not a very positive consensus. And with the shares on a forward P/E of 15.6 dropping only to 14.5 for 2016 while dividend yields are under 3%, I can understand the lack of enthusiasm. But on the upside, EPS is expected to rise by 10% this year and 8% next, and the dividend has kept growing in absolute terms.

Decent dividend

At Cobham, the only FTSE 250 stock of the four, we see even less certainty with a full 10 out of 15 analysts staying Neutral. Of the other five, only two think we should Buy with three saying Sell. In valuation terms things actually look reasonably attractive, with a P/E of 14.6 dropping to 13.6 on 2016 estimates, which isn’t too stretching with dividend of 3.6% to 3.9% — especially as there’s an 18% EPS spike predicted this year.

Back at shock faller Rolls-Royce, the City is only slightly bearish with eight Sell tips against seven Buys, with nine Neutral. But there’s a 9% fall in EPS forecast this year, which would put the shares on a 16.6 P/E with dividends yielding only 2.4% — and a predicted 6% EPS rise for 2016 would only change that to a P/E of 15.6 and a yield of 2.6%.

Which one to buy?

Right now I really see BAE as the pick of this bunch, though I can’t help feeling Rolls-Royce could surprise people over the medium term — and the other two still look good with a long-term view, especially Cobham.

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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.