Defence, security and aerospace is big business. When you factor in geopolitical issues around the world, defence and security are clearly high priorities and governments aren’t afraid to spend.
BAE Systems (LSE:BA) is one of the leading world players in this sector and has enjoyed a stellar 12 months from a share price perspective.
Formed in 1999 by the £7.7bn merger of British Aerospace and Marconi Electronic Systems, it now boasts an impressive reach and operations. Headquartered in the UK, it also operates in the US, Saudi Arabia, India, Qatar, and Australia among others. It actually sells more to the US Department of Defense than our own Ministry of Defence (MoD).
Recent performance and news
BAE Systems reported full-year results on Thursday and its shares rose as a result. It saw profits of £1.89bn, with revenues rising to £18.3bn – a nearly £2bn increase. Sales rose 7% to £20.1bn as several programmes reached milestones over the last year.
CEO Charles Woodburn called 2019 a year of “significant progress” and highlighted an “improved operational performance and increased investment in the business to underpin our growth outlook.”
And that outlook also looks good on the back of a £45bn order backlog stretching through until nearly 2030.
Going into 2020, BAE Systems predicted earnings per share to increase by a mid-single-digit percentage.
Of the company’s markets, the US was the most lucrative in 2019, making up 43% of sales, compared with 22% for the UK. By activity, 39% of sales constituted Military & Technical Services and Support, with 34% going on platforms. Electronic Systems was the company’s third-biggest area at 22%.
It maintained a strong balance between production and aftermarket services, and the geographic mix of its business continued to evolve. What stands out for me is the expansion of business in the US. Already its biggest market, continued growth is a positive signal. Add to this the stable levels of business in the UK and another key market in Saudi Arabia, and the future is bright, I feel.
And the company is always looking out for new M&A opportunities to further enhance its operations. It has agreed to buy Collins Aerospace’s Military Global Positioning System business for $1.925bn and Raytheon’s Airborne Tactical Radios business for $275m.
What I would do now
The recent trading update, coupled with an extensive order backlog signifies a business that is thriving and could be a really good earner for UK investors, I feel. The share price has risen nearly 38% in the last 12 months, but I do not believe that makes it expensive. If you were to crunch the numbers further, you would see there has been a year-on-year increase in profits as well a healthy increase in the dividend per share.
If you are looking for a stock that has a burgeoning market, a solid business plan and fundamentally enough business to keep growing, BAE Systems could be the one for you, I feel. Of course political factors must be taken into account but these seem to be working in the firm’s favour. Increasing political tensions around the world mean BAE Systems should continue to benefit from government defence spending globally. But even in more peaceful and less volatile times, defence spending remains a key part of most national budgets, so I feel BAE is a strong investment choice in general.
