Sometimes there is no pleasing the market. BAE Systems (LSE: BA.) reported exceptional full-year revenue and profits today (21 February) and said it expects double-digit revenue growth this year. The annual dividend was hiked 11%. Yet the BAE Systems share price fell 3.2% at the time of writing.
Why? And is this simply a buy-the-dip opportunity?
The year that was
In 2023, BAE recorded sales of £25.3bn, a 9% rise on the year before and more than the market was expecting (£24.6bn). Underlying operating profit rose 9%to £2.68bn and earnings per share (EPS) came in 14% higher at 63.2p. This was also higher than the EPS guidance of 10-12% growth.
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Meanwhile, it announced an 11% rise in the annual dividend, upping it to 30p a share from 27p. This cements BAE’s status as a Dividend Aristocrat. The yield is currently 2.47%.
Incredibly, the defence company’s order intake over the last two years totalled £75bn. And the order backlog has now reached a record £69.8bn.
Obviously this has been fuelled by the dreadful war in Ukraine, which is driving continuous demand for military equipment. Yet global defence spend has risen in general, a trend that management sees continuing and which it is well positioned to benefit from.
Our focus on operational excellence continues… as we execute on complex, long-duration programs like Dreadnought, Type 26 and Hunter Class frigates, Typhoon and F-35 jets, electronic warfare systems, combat vehicles, and many other programs
BAE Systems
The firm ended the year with cash of £4.1bn and easily manageable net debt (excluding lease liabilities) of £1bn.
So why are the shares down?
The reason for the share price fall seems related to guidance for 2024. It expects sales to grow 10%-12% but underlying EPS to advance 6%-8%. Therefore, it is forecasting slower earnings growth.
Meanwhile, annual free cash flow is expected to drop by half to £1.3bn from £2.6bn last year.
Now, it should be noted that this guidance incorporates the recent $5.5bn acquisition of Ball Aerospace. The impact here is because this deal was funded through £1.2bn of existing cash as well as new external debt.
However, this acquisition should pay off. Ball Aerospace is a leading provider of spacecraft, mission payloads and antenna systems. So this deal will significantly expand BAE’s offerings in space as well as land, air, sea and cyber.
More specifically, it increases its exposure to high priority areas of the US Department of Defense budget. And that’s got to be a good thing moving forward, despite the hit to near-term cash flows.
Would I invest now?
The shares are trading at 18.6 times this year’s forecast earnings. This may present valuation risk buying in today because it’s a higher multiple than the stock has traded at for many years. And despite the drop today, the share price still isn’t far off an all-time high.
Yet on the earnings call, CEO Charles Woodburn said: “While most of our order volume was driven by existing programme positions that pre-date the Ukraine conflict, orders to restock and upgrade heavy armour and munitions are starting to come through.”
Given the strong likelihood of further growth in earnings and dividends, I don’t think the stock is overvalued. In fact, I’d consider investing on this dip if I didn’t already own shares.
