Friday tips round-up: BAE Systems, Cobham, Rolls Royce, Ultra

21st Feb 2014 08:17

Markets hate uncertainty and BAE Systems still has quite a bit of it. Indeed, the picture regarding the outlook for defence spending Stateside is now much clearer, crisp and clean even - but also quite sombre. Back in the UK, things are just about as clear, and sombre too. This is a company whose revenues have grown by just two per cent over the last five years. In its favour, the shares have the support of 1bn pounds in planned cash returns to shareholders in 2014. If the dividend remains flat then the yield on the stock comes in at five per cent. Further, the company's intention is to double the size of its share buyback programme to 400m pounds and the balance sheet, with debt at just 0.3 times EBITA, can take it. US spending will come back, but that is years away. So to keep its order backlog steady at £43bn it must squeeze more orders out of the UK (not easy) or elsewhere in the global defence market. Hence, the uncertainty remains, writes the Financial Times' Lex column.US defence spending has fallen but there is more to it than that. The US budget includes a War Support element for supporting troops on the ground that has decreased alongside the withdrawals from Afghanistan and Iraq. However, after the large falls observed in the last two years the budget is expected to stabilise near year-end 2013 levels. Seen from another angle, the defence spending cuts are about fewer boots on the ground and not about stopping spending on huge new projects such as the F35 Joint Strike Fighter. Even if some such investments in new defence platforms are curtailed (likely) no one knows exactly on which ones the axe will fall. Firms such as Cobham or BAE which have invested heavily in areas such as cybercrime, or also have strong positions in civil, which would include Rolls-Royce or niche players such as Ultra, should outperform in the longer run. Nevertheless, these are fragile markets with a tendency to overreact, The Times' Tempus says.Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.AB