In sharp contrast to many stocks that have recovered strongly since March’s market crash, FTSE 100 defence juggernaut BAE Systems (LSE:BA) has barely moved. The shares are still almost 30% down on the near-record-high price hit back in February.
Should today’s trading statement change this? I think so. Let me explain.
BAE: down but not out
Predictably, BAE has been impacted by the coronavirus during the second quarter of its financial year. Its UK-based Air and Maritime divisions were among the worst hit, although this was mitigated by “strong underlying operational performance and cost control measures”.
Across the pond, the FTSE 100 member’s Controls and Avionics business has also been affected and this could continue for a while. Demand has also been lower at its Power and Propulsion business and cybersecurity division.
On a brighter note, BAE does look to be getting back to work. Productivity levels at its defence businesses (which generate most of the firm’s revenue) “improved” in June. Although many are still operating from home, the company said that more than 90% of its staff were getting on with things.
What about the outlook?
Here’s where things get interesting. According to BAE, sales are predicted to be “broadly stable year-on-year“, although profit over the first six months of 2020 is likely to be around 15% lower. That’s not great, but it’s not a disaster compared to what’s going on at other UK-listed stocks.
Encouragingly, the company also said the performance in the second half of 2020 will be “much stronger” as operations return to full steam. The caveat, of course, is that this outlook could change rapidly in the event of a significant second wave of the coronavirus.
Despite the disruption caused by the pandemic, BAE’s acquisition spree has not been impacted either. The $275m purchase of Raytheon’s Airborne Tactical Radios, revealed in January, completed last month. Another acquisition, Collins Aerospace’s Military Global Positioning System business, should be finalised “early in the second half“.
On top of this, the £15bn cap is continuing to invest in new facilities as part of its growth strategy. It’s also trying to get its pension scheme in order, having recently “injected” £1bn.
This doesn’t sound like a company in crisis to me.
A potential bargain then?
I’m tempted to think so, even if BAE’s shares were trading fairly flat today. Perhaps investors are more concerned over the possibility of a second coronavirus wave to see the green shoots in today’s statement.
Then again, there could also be some reluctance to buy given the uncertainty surrounding the company’s final dividend payment from the last financial year.
Back in April, BAE said that it would make a decision on this when half-year numbers are confirmed next month. Personally, I think there’s a fair chance of the dividend being paid based on this update.
Ultimately though, it shouldn’t matter. As we never tire of saying at the Fool UK, stocks should be purchased with the intention of holding on to them for the long term. Don’t let the tail wag the dog.
Bottom line on BAE
At a little less than 11 times earnings and considering its defensive qualities, I think BAE is something of a bargain right now. Hold it as part of a diversified portfolio and the eventual returns should make up for any near-term volatility.
