BAE Systems IMS

A global defence, aerospace and security company. BAE Systems delivers a range of products and services for air, land and naval forces, as well as advanced electronics, security, information technology solutions and support services.  I have a holding in my income portfolio (epic code: BA.)

 

BAE released an interim management statement stating that trading for the period has been consistent with management expectations.

Management state that they expect double-digit growth in underlying EPS for 2013, this includes the effect of the share repurchase programme and reductions due to the US defence budgets. This guidance also anticipates a satisfactory completion to the Salam pricing negotiations by the year-end.  If negotiations extend beyond the year end, EPS for 2013 would be affected by approximately 6-7p.

In commenting on the current US government shut down, they state that the action has not had a material effect on financial performance, although if the action became protracted then the government shutdown would start to reduce earnings.

There was positive news from international markets outside of the UK and the US, where activity remains vibrant and multiple opportunities are being pursued.  This includes prospects in the UAE for the supply of Typhoon aircraft and other capabilities. Management state £5bn of non-UK/US orders were received in the year to date, this compares to £5.2bn for the whole of 2012, which in itself was up 59% on 2011.

In addition to the US shutdown, the other concerns I have are the resignation (announced on 20 August) of Linda Hudson the CEO of the US division, who has an excellent track record.  Her replacement will be one of the key decisions over the next 6 months.  I am always concerned when directors embark on a share buy-back programme, where the price to book value is substantially above 1.2.  BAE's P/BV is currently 3.4 and buy-backs at this price do not look good value, with owner's earnings (book value growth plus dividends) taking many years to recover the equity depletion.

The current SP of 448p at about 10.5x this year's expected earnings and delivering an expected yield of 4.6% looks good value, but there are a few obstacles that may trip them up along the way.