ii view: BAE Systems stays on target for double-digit growth

Year-to-date trading update

• Around £25 billion of orders secured
• Full-year sales and earnings guidance unchanged

Chief executive Charles Woodburn said: 

"Our operational and financial performance so far in 2024 reaffirms our confidence in achieving the upgraded full year guidance we issued at the half year. Focusing on operational excellence, contracting discipline and growing our workforce is enabling us to consistently deliver critical capabilities and technologies for our customers worldwide. 

“At the same time, we continue to invest in our business for the long term, which together with our broad geographic and domain diversity, positions us well for continued growth in the years ahead."

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ii round-up:

BAE Systems (LSE:BA.) today flagged continuing order demand as the defence equipment maker maintained full-year sales and profit forecasts previously increased at its first half results.

Orders year-to-date totalled around £25 billion, with the land, air and sea equipment manufacturer continuing to expect annual sales growth of between 12% and 14% and an increase in annual earnings of up to 13%.

Shares in the FTSE 100 company fell 0.5% in UK trading having come into this latest news up by a quarter year-to-date. That’s similar to fellow UK defence contractor Babcock International Group (LSE:BAB) and comfortably ahead of a 4% increase for the FTSE 100 index itself during 2024. 

BAE Systems makes an array of equipment from submarines to jet fighter components and armoured vehicles. 

Notable orders in the second half of the year from 30 June include a $184 million win for 48 additional vehicles for the US Army, a $493 million award for M109 self-propelled howitzers, and a A$270 order for guided weapon components in Australia. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on BAE post the news, raising its estimate of fair value to 1,604p from a previous 1,545p per share.

Results for the year to 31 December are likely to be announced mid-to-late February. 

ii view:

Competing against global rivals such as Lockheed Martin Corp (NYSE:LMT) and Northrop Grumman Corp (NYSE:NOC), BAE Systems employs approximately 100,000 people in around 40 countries. Aircraft related sales generated its biggest slug of profit during 2023 at 34%, followed by electronic systems such as navigation equipment at 31%, maritime items 15%, platforms & services including vehicles and ammunition at 13% and cyber & Intelligence the balance of 7%. Geographically, the US proved its largest market in 2023 accounting for 46% of sales, with the UK at 26% and other big customers including Saudi Arabia at 11% and Australia 4%. 

To the downside, ethical concerns given the making of weapons, may deter some investors from buying its shares. Changes of government can come with future budget implications. Acquisitions, including its relatively recent purchase of Ball Aerospace, are not without risk, while an estimated price/earnings (PE) ratio above the three- and 10-year average may suggest the shares are not obviously cheap. The share price has also previously struggled to make a move about 1,400p stick.

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More favourably, conflicts in the Middle East and Ukraine along with heightened tensions between the West and Russia and China cannot be ignored. Diversity of both product and geographical region exists. The purchase of Ball Aerospace has widened its product portfolio into the space arena, while the dividend payment is progressive, rising for more than 17 years consecutively and leaving the shares on a forecast yield of around 2.3%. 

On balance, and despite continued risks, this major defence contractor appears to remain deserving of its place in many already diversified investor portfolios.  

Positives: 

• Diversity of products and geographical sales
• Progressive dividend policy

Negatives:

• Arms manufacturing may generate ethical concerns
• Subject to government finances

The average rating of stock market analysts:

Buy