US Edition BAE Systems
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Questor says BUY
Defence giant BAE Systems is one of Questor's tips of the year, but the shares are 9pc lower than the recommendation price.
It was argued that concerns about defence cuts had been priced into the shares. However, the market has been fretting to such an extent that the shares have been sent to levels not seen since the gloom of the financial crisis in 2008.
The shares actually went below 300p in mid-August and Questor noted in this column and the weekly Questor Plus podcast (which can be found on the Questor page of Telegraph.co.uk each weekend) that the shares looked compellingly undervalued. The shares have bounced by more than 30p since then.
Yesterday, it was revealed that BAE had appointed JP Morgan and Wells Fargo to look at options for its Platform Solutions business – including a potential sale. It is reckoned that the group could sell the unit for about $2bn (£1.3bn).
As one analyst said yesterday: "They may also want to remind people how much their portfolio could be worth, given that the stock has fallen so much."
Platform Solutions specialises in electronic components such as cockpit displays for fighter jets and digital engine controls for commercial aircraft. It is also a producer of components for hybrid buses.
This business is likely to be non-core and will give BAE a substantial armoury with which to purse its strategic objectives – which has a renewed focus on services. An example of this was the purchase of ship repair group Atlantic Marine in May for $352m.
BAE's balance sheet is strong, with cash balances on June 30 standing at about £2.5bn, so strategic purchases in areas such as "homeland security" look increasingly likely.
The share price has underperformed US defence groups Lockheed Martin and Northrop Grumman this year – and the shares are trading at a lower rating than peers. BAE also has a much better yield for incomer seekers.
BAE shares are trading on a December 2010 earnings multiple of 7.7 compared with Lockheed on 9.4 and Northrop on 8.6. The yield on BAE shares is 5.1pc, compared with 3.7pc at Lockheed and 6.1pc for Northrop. Questor regards this dividend as safe.
The shares were named as one of Questor's tips of the year on January 1 at 359½p and are now 9pc below the recommendation price, compared with a market up 1pc. The valuation still looks compelling from a value point of view and the shares remain a buy.