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BAE Systems plc looks ready to fly

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Defence and aerospace contractor BAE Systems (LSE: BA) has been roaring for some time now. Its share price is up more than 130% over five years and it has continued its strong momentum in the past 12 months, rising another 30%. It’s a far cry from the post-crisis years of austerity, when governments around the world, including the US and UK, were cutting back on military spending, and defence stocks were on the back foot.

On the offensive

This morning marks another positive day for the £20bn market cap group, with chief executive Ian King issuing a statement confirming that 2017 has started with “good momentum“, driven by an improving outlook for defence budgets in a number of its key markets.

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In the statement, issued ahead of today’s annual shareholder meeting, King said trading for the period has remained consistent with expectations expressed in February’s results. He said the business is performing well and building on a strong operational performance in 2016, with a well-defined strategy, a large order backlog, long-term programme positions and a well-balanced portfolio. 

String of victories

This all looks good, with King, who retires in July to be replaced by Charles Woodbury, claiming BAE Systems is well placed to continue to generate attractive returns for shareholders. “The group’s outlook remains unchanged with 2017 underlying earnings per share expected to be approximately 5% to 10% higher than the 40.3p in 2016,” he added.

BAE Systems has been bolstered by striking a number of key deals in 2017. In January, the group secured a £419m contract to provide 145 M777 ultra-lightweight howitzers to India. It signed a heads of agreement with Turkish Aerospace Industries to collaborate on the design and development phase of an indigenous next-generation fighter for the Turkish Air Force.

Flying high

In February, it completed the acquisition of IAP Research, which enhances its position in advanced weapon systems, such as the electromagnetic railgun. That same month, the new San Diego dry dock accepted its first docking, receiving orders of £284m in the first quarter.

In March, it received the full £1.4bn Royal Navy contract for the sixth Astute Class submarine, followed by an £87m contract win from the US Army to perform technical support and sustainment of M88 recovery vehicles. The MBDA joint venture, in which BAE Systems has a 37.5% interest, has continued to win new orders, with BAE’s share valued at approximately £143m.

Taking off

The more uncertain our world becomes, the more secure BAE Systems looks. The general election should inject further certainty, unless Jeremy Corbyn somehow wins. Given all the good news, the forecast valuation of 14.5 times earnings looks a decent entry point, and a forecast yield of 3.4% covered two times is nothing to carp about.

The future looks bright, with forecast earnings per share growth of 8% this calendar year, and another 8% in 2018. Stronger sterling may take some of the shine off its foreign earnings, but two months ago I named BAE Systems as a stock I would buy right now, and can see nothing in today’s statement to make me change my mind.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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