Share focus: BAE Systems

The impact of the war in Ukraine on global geopolitics has led to a record level of orders at BAE Systems, with governments beefing up spending on defense from nuclear submarines to tanks and fighter jets.

BAE Systems operates through the following segments:

Electronic systems segment – is composed of the US and UK-based electronics activities, including electronic warfare systems, electro-optical sensors, military and commercial digital engine and flight controls, precision guidance and seeker solutions, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.

Cyber and intelligence segment – includes the US-based Intelligence and Security business, and UK-headquartered Applied Intelligence business, and covers the group’s cyber security, secure government, and commercial and financial security activities.

Platforms and services (US) segment – manufactures combat vehicles, weapons and munitions, and delivers services and sustainment activities, including ship repair and the management of government-owned munitions facilities.

Air segment – deals with UK-based air activities for European and International markets, and US programs, and its businesses in Saudi Arabia and Australia, together with its interest in the European MBDA joint venture.

Maritime segment – focuses on the group’s UK-based maritime and land activities.

Headquarters segment – includes the group’s head office and UK-based shared services activities, together with its interest in Air Astana.

Figure 1: Revenue exposure by country

Source: Factset

Investment thesis:

BAE offers sustained earnings and cash flow growth, underpinned by major programmes and long-term sustainment activities. In particular, higher-growth US activities support a high-single-digit EPS compound annual growth rate (CAGR) and higher YoY cash flows for the foreseeable future.

BAE has a balanced portfolio, with 44% of sales derived from services and support, and 35% from major programs, providing revenue visibility well beyond our forecast horizon. Exposure to US growth sectors and programs is also well diversified. BAE Systems is trading on 15x 2023 P/E, 10% EPS growth and a 3% dividend yield. The share is attractive on a 12-month view trading at a forward PEG ratio of 1.5x.

Figure 2: BAE Systems summary of financials

Source: Company data, Berenberg

Figure 3: BAE Systems 12-month forward P/E ratio

Source: Factset

Figure 4: BAE Systems 12-month forward PEG ratio

Source: Factset


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