Western powers up the ante
Against a cauldron of rising geopolitical instability across the globe, I believe that the stage is set for the likes of BAE Systems to enjoy splendid earnings growth as key nations gradually bulk up their arsenals.
With political tension in Ukraine continuing to escalate, and fears abound that Russian intervention in the crisis could herald a new Cold War, both the US and UK this month called on fellow NATO members to hike their defence expenditure to 2% of total GDP in line with their own targets.
Consequently the groups fellow members agreed to hike arms spending with a view to hitting the 2% marker within the next decade. For the defence industry this provides fresh sales opportunities and finally puts to bed an era of gradual budgetary declines in the West, a situation exacerbated by the impact of the global recession five years ago.
But potential conflict with Russia is not the only hot potato world leaders are having to deal with. With ISIS rebel forces cutting a path across Syria and Iraq, China looking to increase its influence in South-East Asia, and political instability in North Africa and the Middle East rising, I expect the order books of the worlds largest weapons manufacturers to receive a hefty uptick in coming years.
And for BAE Systems, the prospect of surging sales from non-Western customers also promises to drive growth higher. In a bid to court sales in high-growth emerging regions the firm has set up a base in India in recent times, while in June the firm elected to merge its operations with Saudi Arabias Riyadh Wings in a bid to bolster its already-lucrative relationship with the country.
A vivacious value stock
The effect of reduced budgetary spending from traditional Western customers has forced BAE Systems to suffer extreme earnings woe in recent times, and the business has failed to string together two consecutive years of growth for what seems like donkeys years.
And City analysts expect the arms maker to print further sizeable weakness this year with an 11% earnings decline, to 37.4p per share. But the business is anticipated to make a comeback from 2015, when a slight 4% improvement is predicted to 39p.
At these levels I believe that BAE Systems provides plenty of bang for your buck. For this year the company sports a P/E multiple of 12.2 times predicted earnings, trumping a forward average of 15.1 for the complete aerospace and defence sector and comfortably within terrain of 15 times or below which represents handsome value for money. And next years uptick pushes this still further to just 11.8, bolstering the firms position as an irresistible growth pick.
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Royston Wild 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.