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20 Feb 14. BAE warns US budget cuts to hit profits. BAE Systems, the world’s third biggest defence contractor, warned on Thursday that cuts to US government spending would hurt profits despite project wins in
Saudi Arabia. With Congress planning to shave $450bn from US defence budgets over the next decade, BAE said that its North American business would shrink by around 15 per cent in 2013 and 2014. The results came a day after BAE said it had settled a long-running dispute with Saudi Arabia over the pricing of 72 Eurofighter jets, bringing to an end almost two years of uncertainty. But BAE said it would not receive a lift from the new terms of the agreement. Overall, the company said full-year earnings per share for 2014 – excluding certain exceptional items – were expected to be down between 5 and 10 per cent on last year, sending shares in the defence group down 9 per cent to 397.7p. Britain’s largest defence contractor and manufacturing employer is targeting growth markets such as the Middle East as it seeks to offset weak demand from the US and Europe, due to withdrawal from Iraq and Afghanistan as well as public spending cuts. The company has signed around £6.4bn of deals with Saudi Arabia in the past year, including a further £1.5bn contract for Tornado aircraft upgrades and weapons. Saudi Arabia is the second biggest spender on defence equipment worldwide. It has already doubled spending on military equipment from $3.8bn in 2009 to $8.4bn in 2013 and is pledging to expand this to $9bn by 2023. BAE’s search for new sources of revenue has seen it pursue a failed merger with Airbus owner EADS and launch a major push into emerging defence markets such as the UAE and India. It is also cutting shipbuilding capacity in the UK, closing the Portsmouth shipyard with the expected loss of 940 jobs. The company said 2013 underlying earnings before interest, tax and amortisation rose from £1.86bn in 2012 to £1.93bn in 2013. Sales increased by 2 per cent to
£18.2bn, while underlying earnings per share rose 9 per cent to 42p. Analysts at Jefferies said: “The storms of US defence cuts and sequester have passed, but their shadows linger in full-year 2014. We estimate BAE’s full year 2014 guidance points to earnings before interest and taxation perhaps 7-8 per cent below our forecast of £1.9bn and earnings per share around 4-5 per cent lower than our forecast 40.8p.” The company increased the full year dividend by 3 per cent to 20.1p a share. Ian King, chief executive, said: “Overall, the group delivered a solid performance in 2013, against the background of reduced government spending and challenging market conditions.” (Source: FT.com)
February 20, 2014 1:43 pm
FT Lex Comment: BAE Systems: not so defensive. The stock market hates uncertainty, right? And since last autumn two big areas of fuzziness hanging over BAE Systems have cleared. The US budget deal has provided a much clearer picture of what that country will be spending on defence. And this week came news that BAE has finally sorted out payment terms with Saudi Arabia on an order for Typhoon aircraft. So with all that out of the way it should be bright days ahead for the share price. Not so fast. BAE shares fell 8 per cent on Thursday as the extent of the US damage became clear. The US defence business will shrink by 12-13 per cent over the next couple of years. Earnings per share will fall 5-10 per cent in 2014. Bury any idea of defence companies being defensive. At least the shares have support from £10bn of planned cash returns to shareholders in 2014. Assuming the dividend stays flat this year, the shares yield 5 per cent. And BAE is planning to double its share buyback to £400m. That should be affordable – yes, the balance sheet has moved from net cash to net debt, but at 0.3 times earnings before interest, tax and amortisation debt is hardly a cause for concern. But cash distributions can only cushion the blow of falling earnings for so long. At some point BAE will h

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