Investment in the defence sector has, by and large, proved to be a winner for long-term investors, such is the ever-present nature of warfare across the globe.
Lumpy contract timings have proved to be a problem of late over at the likes of BAE Systems (LSE: BA), but rising geopolitical tension looks likely to see governments the world over light a fire under their arms budgets in the years ahead.
Indeed, BAE Systems has strode to fresh record peaks above 600p per share after announcing late last week that it expects improving market conditions to push earnings per share between 5% and 10% higher in 2017.
The Farnborough manufacturer noted more specifically that “in the US, following the two-year Bipartisan Budget Act signed in 2015, there are signs of a return to growth in defence budgets, with the new administration expected to further increase defence and security spending.”
And sales to this key customer look set to explode following the election of President Donald Trump. Just this week the White House announced plans to raise the country’s arms-related by 10%, or $54bn.
With demand also growing in its other bases in the UK, Saudi Arabia and Australia, BAE Systems marked in £22.4bn worth of orders last year, up from £14.9bn the year before. And this caused the business’ order book to swell by £5.2bn, to £42bn.
The City certainly agrees with BAE Systems’own near-term earnings projections, and has chalked in earnings growth of 6% for 2017. And the number crunchers expect the missiles mammoth to follow this with a 7% advance next year.
I reckon BAE Systems’ forward P/E ratio of 14.4 times is splendid value given its rapidly-improving revenues outlook.
Sales star
I am also convinced Associated British Foods (LSE: ABF) has a very bright earnings outlook thanks to its Primark clothing division.
The food-and-fashion seller advised this week that the impact of sterling weakness will help push revenues at Primark 21% higher in the first six months of the fiscal year. Excluding currency factors sales are anticipated to have advanced 11%, a result Associated British Foods puts down to “increased retail selling space.”
The business added 0.8m square feet since the end of September, including the unveiling of new stores across the UK, Germany, France, Spain and the US. And Associated British Foods remains on course to add 1.3m square feet for the entire year, it advised.
But surging demand for its cut-price clothing is not the only cause for celebration, and Associated British Foods announced that at its AB Sugar division, “higher sugar prices, increased production in Africa, and further benefit from the performance improvement programme will deliver a substantial increase in profit.”
Against this backcloth the City expects Associated British Foods to enjoy earnings growth of 12% and 10% in the years to September 2017 and 2018 respectively. So while a forward P/E ratio of 21.9 times may be slightly toppy on paper, I reckon the firm’s excellent sales momentum warrants such a premium.
