© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
October 10, 2013 12:26 pm
Some anniversaries are best ignored. A year ago to the day on Thursday, the proposed merger of Airbus and BAE Systems fell apart. We’ve moved on, says BAE. (Haven’t we all?) Other anniversaries are worth noting. Give or take a few days, it is five years since Ian King became chief executive of the UK defence company. Its performance, measured in total shareholder returns, has hardly been stellar in that time – investors have reaped 70 per cent compared to 100 per cent for the FTSE 100 index (though in line with Lockheed Martin).
As Thursday’s trading update from BAE shows, this is one noisy defence operating environment. With the US government shutdown, sequestration, shrinking defence budgets in its two main markets, haggling over price with Saudi Arabia (good luck with that), and the search for a replacement for its top US executive, there is a lot that could go wrong for BAE in the short term. For example, if the Saudi talks are not resolved this year it could fail to meet its double digit earnings growth target.
BAE’s underlying operations are strong, and it has already won £5bn of non-UK/US new orders this year. And despite sector-wide worries its shares are up a third in 2013. But its valuation still trails the European aerospace and defence sector, for a reason. The US defence sector squeals about sequestration, but its impact has been mild so far. Indeed, this is one of the reasons the sector’s stock market performance this year has been so strong. If sequestration really starts to bite, or if budget cuts slash even more off US defence spending, that rally looks overdone.
On a 2014 price/earnings multiple of nearly 11 – a third lower than its European peers – BAE looks cheap only if the defence sector avoids the worst of budget cuts. Given the antics in Washington, however, the signs are that defence stocks will have to return to base to refuel.
Email the Lex team in confidence at email@example.com
Please don't cut articles from FT.com and redistribute by email or post to the web.