Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at BAE Systems plc (LSE: BA) (NASDAQOTH: BAESY.US) to ascertain if its share price can return to 514p.
Initial catalyst
Of course, before we can establish whether or not BAE can return to 514p, we need to figure out what caused it to reach this level in the first place. It would appear that BAE reached this high at the end of 2007 due in part to the general euphoria of the wider market, directly preceding the financial crisis.
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However, 2007 was also shaping up to be a good trading year for BAE. In particular, in its 2007 half-year results the company revealed that underlying earnings per share were up 32% year-on-year and that net cash had reached $1.3 billion. In addition, the company’s order book had expanded 5% in the first half of the year, to just under £32 billion, locking in more than two years worth of sales.
With these impressive growth figures, investors were prepared to pay a premium for BAE’s shares. Indeed, at a price of 514p, the company was trading at a P/E of 16.6, which is not that high when you take into account the fact that that the company’s earnings were growing at 30% per annum.
But can BAE return to its former glory?
Unfortunately, since 2007 the world has changed significantly and, owing to austerity measures brought in by governments around the world after the financial crisis, defence spending is under pressure. As a result, demand for BAE’s services and equipment is not as strong as it once was and the company is having to drive growth through cost cutting and bolt-on acquisitions.
What’s more, talks that would have seen BAE supply 60 jets to the UAE recently collapsed and discussions on another equally important deal with Saudi Arabia have stalled. These two deals were forecast to make up the bulk of the company’s earnings for the next few years.
Still, despite this bad news, BAE’s services are still in demand. For example, after taking into account the loss of the two jet deals, BAE’s earnings per share are forecast, at worst, to grow 12% to 37p for 2013. This indicates to me that BAE has the ability to return to 514p as earnings per share of 37p indicate a P/E of 13.9 at this level — not to taxing when BAE’s peers in the defence sector are trading at a P/E of 21.
Foolish summary
So overall, despite the loss of recent deals, I feel that BAE can return to 514p.
