These two engineering giants are revving their engines again
After a mixed few years both BAE Systems and Rolls-Royce Holding have picked up speedin recent months, helped by the falling pound. Is now the time tohop on board?
All Systems go!
Defence manufacturer BAE Systems (LSE: BA) has been going great gunslately, its share price up 17% over the past year, and 107% over five years. Ithas also been handed a significant Brexit booster due to exchange rates, which has increased the sterlingvalue ofits ample dollarearnings.
Todays trading statement confirms the impression of a companyfirmly on the offensive, with the groupspositive outlook for 2016 remaining unchangedand expectedunderlying earnings per share (EPS) likely to be5% to 10% higher than last years 36.6p. The statement also highlighted the 1.2bnTyphoon 10-year support partnership agreement in the UK, signed in July, and a positive US defence market outlookwith expectedproduction ramp-ups on a number of long-term programmes.
BAE is also working withthe UK and the Saudi Arabian governments onthe next five-year Saudi British Defence Co-operation Programme, which is progressing despite growing international concern over Saudis aggression towards Houthi rebelsin the Yemen.
Sense of security
The future isnt all rosy. Standard & Poors recently downgradedits rating on the companys long-term debt from BBB+ to BBB, noting the substantial shortfall in its pensions. Falling gilt yields will only up the pensions pressure, although S&P did suggest that metrics would improve over the next two years,supported by steady operating results and improved cash flow generation.
BAE was hit by post-financialcrisis austerity but government defence spending is on the march again, in response to a politically unstable world. The stock currently yields 3.8%, covered 1.69 times. Dividend progression is expected to be steady, if hardly spectacular. Strong past performance would suggest that todays price of 13.87 times earnings is far from toppy, especially given continuing Middle East uncertainty and increasingly aggressive posturing from Russia and China.
No longer a high Roller
Engineering giantRolls-Royce(LSE: RR) has giveninvestors a shockingly bumpy ride in recent years. It share price is 32% lower than three years ago, and despite a Brexit bounce (for which it can hardly claimthecredit) the stock is only up marginally over the last 12 months. Investors are still reeling from the fact that this illustrious name had issued five profit warnings in just two years, due to falling new orders and aslump in its lucrative after-market as older engines nearthe end of their working lives. Its credit rating was cut in May, along with many senior managers.
However, there havebeen no profit warnings since November and Rolls-Royceslong-term order book isvalued at a whopping 79.5bn, up 4% ontheyear. This includes a $2.7bn new order from Norwegian Airlines for Trent 1000 engines, while itsafter-market should be boosted by the720m purchaseof itsremaining 53% stakein Spanish company ITP.
Chief executive Warren East has a big job turning this crate around and the yield disappoints at 2.15%, after the recent dividend cut. Trading at 12.85 times earnings, his troubles arepartly reflected in the price. Rolls-Royce is back on the roadbut it will be some years before it really starts purring.
The doom-mongers say Brexit is a disaster for the UK, but it has been great news for the FTSE 100.Still, it’s early daysand if Britain does slide into recession the turbulence will return with a vengeance.
This BRAND NEW special Motley Fool report sets out exactly what Brexit means for your portfolio, and how you can take advantage by picking up top company stocks at bargain basement prices.
Don’t fret about Brexit any longer but click here to read this no obligation report. It will be yours in moments and won’t cost you a penny.
Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.