2014 has been a rather mixed year for BAE (LSE: BA) (NASDAQOTH: BAESY.US). Thats because in the early part of the year, sentiment was hit hard by a profit warning that said the companys full year results would be behind previous guidance as a result of weaker than expected demand.
However, since falling by over 10% in the wake of the warning, shares in BAE have recovered strongly so that they are now up 6% year-to-date.
Thats a much better performance than the FTSE 100 has managed during the same period, with the wider index being down 1% since the turn of the year.
Can BAE continue this outperformance and beat the FTSE 100 in 2015?
Improved Forecasts
While 2014 is set to see BAE deliver a fall in earnings of 10%, its prospects for next year are much brighter. Furthermore, they have improved steadily throughout the course of 2014, with BAE now expected to post bottom line growth of 5% in 2015. This is in-line with the wider market growth rate and shows that BAE can maintain a very respectable level of profit growth even when the global defence industry is experiencing highly challenging trading conditions.
Any further improvement in the companys forecasts for next year could mean increasing sentiment, as has been the case during 2014, and this could translate into a higher share price over the medium term.
Valuation
With BAE expected to deliver earnings growth that is in-line with that of the wider market in 2015, it is becoming more difficult to justify the companys relatively low valuation. For example, BAE trades on a price to earnings (P/E) ratio of just 12.3, which is 20% lower than the FTSE 100s P/E ratio of 15.4. As such, BAEs share price could be the subject of a further upward rerating adjustment as we move through 2015 especially if the FTSE 100 maintains its current rating.
Income Prospects
Clearly, a key reason for investors holding BAE in their portfolios is its income potential. With a yield of 4.4%, BAE delivers excellent an excellent income, but its attraction as a dividend stock also lies in the consistency and stability of its payouts. For example, BAE has increased dividends in every one of the last five years, with dividends per share growing at an annualised rate of 4.9% during the period. Thats well ahead of inflation and provides investors with a real terms increase in their income, as well as consistency and stability, too.
Looking Ahead
Although the defence industry continues to struggle, with austerity across the developed world impacting orders, BAEs future appears to be bright. As well as being forecast to deliver earnings growth that is in-line with that of the wider market next year, it has attractive income prospects and the scope for an upward revision to its rating. As a result, BAE could continue its outperformance of the wider index and beat the FTSE 100 in 2015, as it has done in 2014.
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Peter Stephens owns shares of BAE Systems. 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.
