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When I did a review of the Beginners’ Portfolio last month, I took a closer look at BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US), which I considered something of a hidden diamond — sector out of fashion, share price depressed but fundamentals looking good.
Well, my words turned out to be somewhat prophetic, and in the month since then the BAE share price has climbed 59p (15%) to 455.9p today. BAE is now 37% up on our purchase price of 332.3p, which isn’t a bad return in the 10 months we’ve had it — and we’ve had 19.5p per share in dividends too.
BAE starts the year well
The key event, in addition to sentiment becoming generally more positive towards engineering firms, was the release of BAE’s first-half results on 1 August. For the six months to 30 June, we saw the following highlights:
- Sales up 1.3% to £8.45bn;
- Underlying EBITDA down 6% to £865m;
- Underlying EPS down 4% to 17.8p;
- Dividend up 2.6% to 8p per share;
- Net debt down 3% to £1.19bn.
On the face of it, that looks pretty mixed, but some sales and profits have been deferred due to late discussions over a contract to supply 72 Eurofighter Typhoon jets to Saudi Arabia. A favourable outcome sounds likely, with BAE upping its guidance to say that “double-digit growth in underlying earnings per share is anticipated for 2013“.
Despite spending cutbacks, the group’s business in the UK is described as stable, but it is facing further reductions in US defence spend. On the bright side, other international business is looking positive, with BAE having taken further non-UK/US orders during the half to the value of £4.8bn.
Assuming the lower end of double-digit earnings growth, a 10% rise for the full year would put BAE shares on a P/E of only around 10.5, with the interim dividend boost lending support for predictions of a full-year yield of 4.5%.
What do I think of the hidden gem now? I reckon it’s starting to sparkle.
Gloom at BP
When I plumped for BP (LSE: BP) for the portfolio, I reckoned the bulk of the Deepwater Horizon disaster was behind it, but was I being too glib? I might well have been, as the oil giant has now warned us that the total compensation cost is set to rise to more than $42.2bn, after it set aside a further $1.4bn.
That came with first-half results showing underlying replacement cost profit for the second quarter of $2.7bn, down from $3.6bn for the same quarter in 2012, with the 2013 Q1 figure having come in at $4.2bn.
Chief executive Bob Dudley told us that “completion of our operational milestones confirms our confidence in delivering our commitment to materially increase operating cash flow in 2014“, and forecasts are still putting BP shares on a lowly P/E of 8.7.
The share price dropped in response to the results, but at 454.6p today it’s still up on our 434.5p purchase price, and I’m happy to hold.
Steady at GlaxoSmithKline
Meanwhile, GlaxoSmithKline (LSE: GSK) gave us a “steady as she goes” second-quarter report, with sales up 2% and core EPS up 4%, though total EPS fell 11% at constant exchange rates.
The second quarter dividend is lifted 6% to 18p per share, and the company confirmed it expects total share repurchases for the year to come to £1-2bn.
To me, that’s pretty much a “nothing changed” report, and with the price at 1,699p today, I’m happy to sit on our 18% gain in the full hope of more to come.
The same at Vodafone
A first-quarter update from Vodafone (LSE: VOD) was pretty much along the usual lines. Service revenues in mature markets are down, but gaining strongly in developing markets, and growth of 4G penetration into international markets going well — Vodafone has 4G offerings in 10 markets now, having added Spain, Australia and the Czech Republic to its stable.
The big unknowns at the moment are what’s going to happen with Vodafone’s stake in Verizon Wireless, and where it’s going to go with its dividend now that it is committed only to match the previous year’s payment. On those, we have no further news as yet.
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> Alan does not own any shares mentioned in this article. The Motley Fool has recommended shares in Vodafone and GlaxoSmithKline.
