Company Reports

Wide-moat BAE Systems upgraded 2024 guidance on the back of another strong set of results for 2023, with a record backlog of GBP 69.8 billion, representing more than 3.5 times annual sales. After incorporating the updated guidance, we are increasing our fair value estimate from GBX 1,170 to GBX 1,330 on the back of increased profitability for the air and platform divisions. In the midterm, we expect margin for the air sector and platforms to slightly increase from current levels driven by platforms running at full phase production and a higher share of aftermarket revenue.

Escalating global security concerns, intensified by the Ukraine conflict, are driving structurally higher growth in the defense market. We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. BAE Systems is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects.

We are maintaining our wide moat rating and raising our fair value estimate for BAE Systems to GBX 1,170/$59 per share to reflect our outlook for higher defense spending over the medium term, programs moving toward full-rate production, and performance improvements.

Escalating global security concerns, intensified by the Ukraine conflict, are driving structurally higher growth in the defense market. We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. BAE Systems is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects.

Wide-moat BAE Systems upgraded full-year guidance on the back of another strong set of results for first-half 2023, with a record backlog of GBP 66 billion, representing almost 3 times annual sales. We are maintaining our fair value estimate.

BAE Systems enjoys incumbent positions on a diverse set of major global defense programmes. The outlook for defense spending is positive with rising global threats exacerbated by the war in Ukraine. We believe this will be a multiyear growth trajectory as many nations globally, especially in Europe, have underspent since the end of the cold war. Additionally, BAE Systems is well aligned with U.S. Department of Defense growth programmes.

Wide-moat BAE Systems exited 2022 on solid footing with order backlog up 33% year over year. We are maintaining our GBX 700 fair value estimate. The order backlog of GPB 59 billion represents around 3 times annual sales (both including share of equity accounted investments). Notably, orders for the Hagglunds business, which focuses on combat and armoured vehicles, saw robust new orders. Management expects momentum for Hagglunds to remain strong in the medium term. Nearly 6% underlying operating income growth came on the back of a 4% sales growth and 20-basis-point underlying margin expansion to 10.7%.

A rather upbeat trading statement Nov. 15 from BAE Systems as the group maintains guidance and hinted at upgrades to medium-term guidance. We maintain our GBX 700 fair value estimate and believe shares are slightly overvalued. The stock does offer a reliable and growing gross dividend yield of 3.4% at current levels.

Wide-moat BAE Systems is inching along and performing in line with expectations. Sales increased by 3% on an organic basis while EBIT grew by 4%, supported by a slight margin increase. We maintain our GBX 700 fair value estimate and believe shares are overvalued at current levels. As a popular income stock, the dividend increased by 5% and offers a current yield of 3.5%. We see greater capacity for shareholder returns through dividends and buybacks as the pension deficit swung into surplus during the half, eliminating the need for surplus payments.

Wide-moat BAE Systems is trading in line with expectations and reconfirmed full-year guidance despite supply chain and staffing challenges. The group believes it has the necessary levers at its disposal to offset short-term headwinds. Looking further out, the company seems confident that it will benefit from higher defense spending as a result of rising global threats spurred by the Ukraine war. As a result, we increase our fair value estimate by 17% to GBX 700 (ADR: USD 35) to account for higher top-line growth. We increase revenue growth in the later years of our forecasts, as lead times on contract tenders and production tend to be long, especially given BAE’s high share of long-cycle programs. The lower pension deficit due to excess contributions and rising rates also contributed to the increase in fair value.

BAE Systems enjoys incumbent positions on a diverse set of major global defense programmes. The outlook for defense spending is positive with rising global threats exacerbated by the war in Ukraine. We believe this will be a multiyear growth trajectory as many nations globally, especially in Europe, have underspent since the end of the cold war. Additionally, BAE Systems is well aligned with U.S. Department of Defense growth programmes.

Germany’s boost in defense spending, announced Feb. 27, will benefit most European defense contractors and could lead to multiyear increases in the growth outlook for these companies. While it is early days and very difficult to quantify the exact impact, we expect to make positive adjustments to our defense coverage. Of the pure-play defense names, narrow-moat Thales, Dassault, and Leonardo trade at discounts to our fair value estimates while wide-moat BAE Systems trades at a premium. We don’t believe our revisions will change this ranking by much, and our preference is for Thales and Dassault. Despite the impact from a demand and cost perspective on the airline and commercial aerospace companies we cover, we don’t foresee any structural long-term changes to their prospects and as such don’t anticipate any major changes to our fair value estimates. We maintain our preference for wide-moat Safran and no-moat Wizz Air under our aerospace and airline coverage, respectively.

Wide-moat BAE Systems increased order intake by 2.5% in 2021, exceeding expectations and bringing the total backlog to GBP 44 billion. Orders were evenly spread across domains and geographies. Sales and EBIT increased 2% and 8%, respectively, while margins slightly expanded to 10.3%. All divisions except air reported EBIT growth during the year. The group generated GBP 1.9 billion of free cash flow, up from GBP 1.4 billion in 2020. Management is guiding for 2022 midpoint revenue and EBIT growth of 3% and 5%, respectively, while cash flows should be greater than GBP 1 billion next year and exceed GBP 4 billion over the next three years. We are positive on BAE's growth prospects over the medium term, with margins and cash conversion set to improve on the back of improving business mix and efficiency gains. The group’s broad exposure to platforms and geographies allows for stable and predictable cash flows, underpinned by resilient defense demand and multidecade contracts. We don’t expect to make any major changes to our GBX 595/$32.50 fair value estimate; the shares appear slightly overvalued.

Wide-moat BAE Systems maintains its full year guidance as program execution tracks according to expectations. The group anticipates midpoint revenue and EBIT growth for 2021 of 4% and 7%, respectively, with free cash flow generation in excess of GBP 1 billion. Medium-term free cash flow guidance of more than GBP 4 billion equates to nearly 25% of current market value. BAE Systems has been relatively unaffected by the supply chain issues seen elsewhere in the industry as the group enjoys exposure to long-term programs allowing it to manage supplier lead times more effectively. The group’s broad exposure to platforms and geographies allows for stable and predictable cash flows, underpinned by resilient defense demand and long-term multi-decade contracts. We maintain our GBX 595 (ADR: $32.50) fair value estimate, with shares in fair value territory. A relatively secure 4.2% gross dividend yield makes the stock particularly attractive to income investors.

BAE Systems enjoys incumbent positions on a diverse set of major global defense programmes. Defense spending in the U.S., a key market for BAE, declined for nearly a decade since the end of the Iraq war in 2011. The outlook for defense spending is positive with rising budgets in the U.S. and commitments from NATO partners to meet their minimum spending requirements. BAE Systems is well aligned with U.S. Department of Defense growth programmes.

Wide-moat BAE Systems increased its order intake by 14% year on year to GBP 10.6 billion for the first half of 2021 at an approximately 1.1 times book-to-bill ratio, maintaining the group’s GBP 45 billion backlog. Free cash flow of GBP 460 million compares with an outflow of GBP 110 million in the prior-year comparable period and puts the group on the right track to achieve its full-year guidance for free cash flow in excess of GBP 1 billion. Organic revenue growth of 6% was complemented by EBITA growth of 27%, as the majority of business lines recovered from the relatively low 2020 base. Management maintains guidance for 2021 midpoint revenue and EBITA growth of 4% and 7%, respectively, while targeting GBP 4 billion of cumulative free cash flow (about 25% of current market value) over the next three years. The group’s broad exposure to platforms and geographies allows for stable and predictable cash flows, underpinned by resilient defense demand and long-term multidecade contracts. We don’t expect to make any major changes to our GBX 595 (ADR: $32.50) fair value estimate, which suggests shares are nearing fair value. A relatively secure dividend yield of approximately 4% makes the stock particularly attractive to income investors.

BAE Systems enjoys incumbent positions on a diverse set of major global defense programmes. Defense spending in the U.S., a key market for BAE, declined for nearly a decade since the end of the Iraq war in 2011. The outlook for defense spending is positive with rising budgets in the U.S. and commitments from NATO partners to meet their minimum spending requirements. BAE Systems is well aligned with U.S. Department of Defense growth programmes.

Wide-moat BAE Systems experienced good growth in order intake for 2020, at 13%, bringing the group’s backlog to GBP 45 billion. Free cash flow of GBP 1.4 billion, excluding the GBP 1 billion one-off pension contribution, was a solid 60% increase over the previous year, well ahead of management’s GBP 800 million guidance at the first-half results. Revenue growth of 4% was accompanied by EBITA growth of 0.7%, hampered by underrecoveries in the defense business and lower demand from the group’s commercial businesses. Management is guiding for 2021 midpoint revenue and EBITA growth of 4% and 7%, respectively, while targeting GBP 4 billion of cumulative free cash flow (about 25% of current market value) over the next three years. The group’s broad exposure to platforms and geographies allows for stable and predictable cash flows underpinned by resilient defense demand and long-term multidecade contracts. We don’t expect to make any major changes to our GBX 570/$30 fair value estimate, which still reflects decent upside. A relatively secure dividend yield of 4.7% makes the stock particularly attractive to income investors.

BAE Systems enjoys incumbent positions on a diverse set of major global defense programmes. Defense spending in the U.S., a key market for BAE, declined for nearly a decade since the end of the Iraq war in 2011. The outlook for defense spending is positive with rising budgets in the U.S. and commitments from NATO partners to meet their minimum spending requirements. BAE Systems is well aligned with U.S. Department of Defense growth programmes.

Other than resuming its dividend payment, there were no real surprises in wide-moat BAE Systems’ first-half results. As communicated in the trading statement in June, the group experienced good growth in order intake of 11%, bringing the group’s backlog to GBP 46 billion. Free cash flow of GBP 120 million, excluding the GBP 1 billion one-off pension contribution, reflects a solid increase over the cash outflow in first-half 2019. Revenue growth of 4% was accompanied by EBITA decline of 10% due to under recoveries in the defense business and lower demand from the group’s commercial businesses. Management expects a recovery in the second half, with free cash flow guidance of GBP 800 million for the full year. The group’s broad exposure to platforms and geographies allow for stable and predictable cash flows underpinned by resilient defense demand and long-term multidecade contracts. Shares are trading higher on the results, but our GBX 570 (ADR: $30) fair value estimate still has decent upside. A relatively secure dividend yield of 4.7% makes the stock particularly attractive to income investors.