I’m always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market has been overheating.
So right now I’m analysing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today’s uncertain economy.
Today I’m looking at BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) to determine whether the shares are still safe to buy at 421p.
So, how’s business going?
This year has been mixed for BAE. So far, the company has won two large, five-year contracts worth a total of $1.2 billion from the Australian Air Force and the Joint Munitions Command in the United States.
However, in Australia, the company lost a major maintenance contract for the FA-18 jet, to rival Boeing, which has forced BAE to cut 125 jobs.
Still, good progress continues to be made by the company on major projects such as the UK’s Astute class submarines and Saudi Arabia’s Salam Typhoon programme.
Meanwhile, BAE’s management is working to diversify the company away from traditional defence markets, as the threat of cyber security breaches grows. In particular, earlier this year BAE entered into a five-year partnership with Vodafone to tackle the issue of cybercrime on mobile devices.
Moreover, BAE’s management has noted that while defence spending in Western markets is starting to slow, as government austerity measures take hold, orders from emerging-market countries are offsetting some of the decline, bolstering the company’s order book.
Expected growth
Unfortunately, while BAE has secured a number of lucrative contracts for the next few years, many City analysts expect the company’s earnings to remain almost unchanged in the near future.
City forecasts currently predict earnings of 42.2p per share for this year (8% growth) and 41.7p for 2014.
Shareholder returns
BAE’s dividend yield is currently 4.7% — larger than that of its peers in the Aerospace & Defence sector, which currently offers an average dividend yield of 1.9%.
In addition, earlier this year, BAE announced that it was going to use its profits from the Salam Typhoon programme to undertake a three-year, £1 billion share buyback scheme.
Valuation
Surprisingly, despite being one of the biggest defence contractors in the world and supplying weapons systems to many of the world’s major governments, BAE actually trades at a discount to its peers.
BAE currently trades at a historic P/E of 10.8, while its peers trade on an average historic P/E of around 14.5.
Foolish summary
Overall, based on BAE’s defensive nature, discount to sector peers and solid dividend yield, I feel that BAE still looks safe to buy at 421p.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article. The Motley Fool has recommended shares in Vodafone.
