BAE Systems Exits 2022 on Solid Footing

Wide-moat BAE Systems BA. 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 armored 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%.

Across its businesses, customer orders are mainly long term, spanning multiple years and providing good visibility for management for cash generation. 2023 guidance includes sales growth of low to midsingle digits among its divisions and margin expansion. At the group level, this translates to 3%-5% sales growth and higher underlying operating income growth of 5%-7% on margin expansion. Both could prove to be conservative given the strong momentum in the business.