Short-term investors might get jittery when they see $325 billion in defense spending cuts as the congressional Super Committee hacks into budgets across the board. But for global defense contractor BAE Systems (BAESY) those jittery investors may have opened up an opportunity.
On the one hand, the company has been making new contract announcements left and right since President Barack Obama’s Aug. 2 budget cuts announcement. On the same day, BAE racked up a $108.4 million contract modification to provide 45 vehicles and parts for the U.S. Army and Marine Corps.
A week later it scored a nearly $500 billion two year deal to design a new combat vehicle for the Army along with its partners Northrop Grumman Corp. (NOC), QinetiQ North America Inc. (QNTQY), iRobot Corp. (IRBT), MTU and Saft (SGPEY). That’s on top of its a $27.5 million U.S. Navy contract for material and labor required to overhaul three MK 45 gun mounts, announced in the same week.
In its home market in the UK, where defense budget cuts are at 8 percent for the next four years, BAE just signed a $33 million contract to help build the radar system for the Eurofighter Typhoon while its shipbuilding arm is part of the team building two new aircraft carriers to the tune of $11 billion. The UK’s Ministry of Defense has long-term contracts with the company for $380 million a year through 2025.
The company isn’t being reckless, expecting contracts to come hard and fast forever. It knows it’s got to compete with a list of heavy hitters, so it is on the lookout for “modest” investments, BAE Systems’ CEO said during earnings reporting. Sales were down, as well as underlying EBITA and underlying earnings per share. The dividend still rose slightly, at 12 cents a share.
For those willing to hold on through some nervous headlines about defense cuts, BAE looks bound to pull through. "BAE’s exposure to any incremental negative news is more modest than its U.S. peers and its valuation already stood at a significant discount of between 10 to 15 percent to many of those peers, in our view," RBS analysts said in a recent note. BAE Systems reports full year earnings in February.
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