BAE Systems tipped as a ‘hold’ as it delivers solid annual results

19th February 2015

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BAE Systems annual results have arrived inline with expectations but brokers are divided in their outlook for the group as a result of uncertainty over future defence spending.

In its full year results reported on Thursday the weapons and aviation giant announced that sales totaled £16.6bn while the underlying earnings per share was 38p.

Europe’s biggest defence contractor has enjoyed a 20% share price rise over the past 12 months and is up by 12% over three months. Presently the analyst consensus has the stock in ‘hold’ territory but edging towards a ‘buy’.

Following the market update, by 10.51am the group’s shares had edged ahead by 1.50p to 523.50p .

Today brokers at Investec reiterated a ‘sell’ recommendation while Cantor Fitzgerald repeated its own ‘buy’ stance. For his part, Helal Miah, investment research analyst at The Share Centre is calling it a ‘hold’.

Commenting on the firm’s latest set of numbers, he said the crucial point within the detail was that its order back log remains at about £40bn with £10bn worth of orders received from the UK and US, while just over £4bn received from other international markets, mostly Saudi Arabia.

He said: “Stronger sterling levels during 2014 impacted sales by about £600m however, investors should note that translation impacts should improve in 2015 if sterling remains at its current level.

“Despite the defence related businesses suffering over the last few years due to budget cutbacks, this scenario looks to be improving. However, there is anticipation that the US defence budget will increase after President Obama submitted the 2016 fiscal spending plan to Congress with the defense element above previous budget caps.”

Miah added that the UK earnings visibility is becoming clearer and there are hopes that the Middle Eastern countries will remain big spenders. However, he cautioned that investors should be aware that with the decline in oil prices, there is a possibility that certain oil producing nations could cut back on orders.

“With the picture brightening for the defence sector, investors may begin to look at the stock more favourably, especially given the relatively attractive dividend the company pays. However, we continue to recommend BAE Systems as a ‘hold’ for medium risk investors until we see a clearer picture for defence spending,” he added.

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