Broker Jefferies rates BAE shares a 'buy', says earnings woes 'short term'

20th Feb 2014 09:42

Despite a warning from BAE Systems that cuts in US military spending will slash profits by up to 10%, Jefferies has rated the stock a 'buy' with a price target of 350p, stating that the company's woes will be short-term as the firm's US businesses "hit bottom" in 2014. BAE Systems' guidance for 2014 profits point to earnings before interest and tax (EBIT) 7%-8% below the broker's forecast of £1.9bn and earnings per share 4%-5% lower than its estimate of 40.8p."We do, however, have much greater clarity, an encouraging order backlog, a lower pension deficit and end-2013, net debt of £699m versus our forecast of £1.5bn. We believe it all amounts to a creditable, honourable draw," Jefferies told clients."We are painfully aware that the equity market appears not to relish downgrades to forecasts, but BAE is not a high price/earnings ratio growth story that has faltered. The dividend of 20.1p is as we forecast. Agreement of the Saudi variation on price (VoP) promises increased share-buy activity in 2014, in our view. We believe 2014 may be the year in which BAE's fortunes turn for the better."Jefferies said it placed a higher value on BAE "coming to enjoy greater certainty". FP