BAE Systems plc Ordinary 2.5p (BA.)

Company overview

The Group's core activities are the development, delivery and support of advanced aerospace systems and defence products for all 3 branches of the military. BAE Systems designs, manufactures and supports military aircraft, surface ships, submarines, fighting vehicles, radar, avionics, communications, electronics and guided weapon systems. The Group has customers in some 130 countries with major operations conducted in the UK, the US, Australia and Germany.

HL Comment (13 October 2011)

BAE Systems PLC issued its Interim Management Statement today (13 Oct) for the period from 1 July to 11 October. Europe's largest defence company warned of "significant uncertainty" over future levels of US military spending as the country tackles its huge budget deficit. However, the company added that it remained confident of winning orders in spite of constraints on government expenditure in many of its principal markets. With this in mind, BAE had won a $450 million contract to participate in a 24-month technology development phase of the US Army's ground combat vehicle programme. Elsewhere the defence manufacturer said it was assessing the implications of serious flood damage at its electronics base in Johnson City, New York, following severe weather along the US east coast. Looking ahead, management reported that it remained on track to deliver earnings for the full year that would be "broadly similar" to 2010.

Negative Points:

• The uncertainty in the US over commissioning defence equipment programmes is weighing heavily on the company. President Obama announced in April a $400 billion cut in national security spending until 2023.
• BAE is exposed to long-term uncertainty in the UK Defence market due to the MoD's large funding gap.
• The serious flood damage at the group’s US electronic base could lead to delays in sales being deferred until 2012.
• Contract execution risk exists on large defence programmes.
• Saudi Arabian defence spending may slow if oil prices decline.

Positive Points:

• Last month the company confirmed it was planning to lay off 3,000 from its UK workforce of 40,000 in response to slackening demand for military aircraft.
• BAE said it would continue to implement cost reductions, reflecting changes in customer priorities and reduced business activity.
• Negotiations continue between BAE and the Royal Saudi Air Force in respect of price escalation and programme changes with regard to the Typhoon aircraft order. 24 aircraft have been delivered to date.
• BAE is seeking foreign contracts to counter budget constraints in the U.K. and U.S
• The company has been adding small acquisitions to build up a cyber-security division.
• The group announced a £500 million share repurchase programme in July.

Consensus:

On balance, market consensus indicates a cautious buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.

Year Ending	Revenue (m)	Profit Before Tax (m)	EPS (p)	P/E Ratio	PEG	EPS Growth (%)	Total Dividend	Dividend Yield
31-12-2010	21,097.00	1,444.00	28.90	8.10	4.00	2.00	17.50	5.30
31-12-2009	20,374.00	266.00	(2.30)	9.00	1.10	8.00	16.00	4.50
31-12-2008	16,671.00	2,371.00	49.60	10.20	0.40	23.00	14.50	3.80
31-12-2007	14,309.00	1,235.00	26.00	16.50	0.60	26.00	12.80	2.60
31-12-2006	12,333.00	859.00	19.90	17.90	0.60	29.00	11.30	2.70