BAE Results and R-R Update.

BAE @ 335.5p, -5.4% (-1.58%) as at 10:15

Disappointed in the reception to BAE's results but serves to highlight how analysts are often wrong. You would have thought that after all the communications from the company and media articles detailing cuts in Defence spending etc. (see earlier post Rolls-Royce / BAE Systems: Britain reviews defence contract rules.) that there would have been some hardening of expectations towards reduced numbers ( I seem to recall their being something around the Coalition Govt and spending cuts!). More public still has been the scrapping of the Nimrod and Harrier programs.
As it is, there was a sharp spike in the few days prior to the results and then a pretty big deflation after the results were announced.

Against the backdrop of global spending cuts and much publicised legal wrangles the company has increased sales by 1.8% to £22.4bn and profits improved to £1.44bn (£266m last time ex. £1bn impairment charge).

The company is also part way through a restructuring program aimed at costs.
But, with the company on a forecast Price to Earnings ratio of 7.9 for the coming year it seems to me that there has never been a particularly enthusiastic expectation for the company's prospects.
However, the very fact of it having a PE tells you that the company is forecast to make a profit and, despite the cuts from the US and UK Governments, it does not seem to me that Governments are about to stop spending. BAE is a major global player and is still forecast to increase sales and profits albeit by single digit amounts. In the meantime, the 5% plus dividend is a real return to shareholders and the final dividend, at 10.5p per share, was raised by 9.4%.

Slightly concerned about the reduction in cash flow (despite the company's statement that "Good cash generation has been achieved"), and it seems that an increased usage of "current" financing, such as overdrafts, may be the symptom but not 100% sure of the cause, although it may be that pension contributions, acquisitions and regulatory penalties are all factors.
Cash balances were lower but are still very healthy at £2.81bn.
Interest payments of £194m are easily covered by operating profit of £1.636bn as is the dividend which amounts to £574m.

Also concerning, but understandable, is the reduction in the order book to £39.7bn (2009: £46.3bn) but the company is restructuring and continues to look for acquisition opportunities such as the recent cyber security purchases.

At 335.5p, the investment has given me a 5% capital gain (after charges) plus 5.1% in dividends which gives me a total of 10.1% for an investment held since 29/10/09 (14 months).
BAE seems to be a reasonably predictable company then (including the regulatory and legal issues), with low growth expectations and a dividend that has grown by approx 10% per annum for the last 5 years. Steady as she goes then and a hold for my portfolio.

BAE @ 335.5p, -5.4% (-1.58%) as at 10:15 (ex dividend date is 20 Apr. 2011)

Rolls-Royce update.

Elsewhere, R-R has taken another hit in the short term as the US Senate voted to eliminate the $450m 2011 spend on the the F-35 engine alternative being developed by R-R and GE (see selftrade.co.uk: Gates urges Senate to kill funding for F-35 engine).
The shares have been driven down despite the potential for F-35 disappointment being well publicised and ongoing for a number of years now.  Elsewhere, broker upgrades from Nomura (sharecast.com: Broker snap: Rolls-Royce to see strong growth in 2011), and UBS (sharecast.com: Broker snap: Rolls upgraded but upside risk limited), appear to have gone unnoticed.
If I wasn't already a holder then I would be looking at this as a buying opportunity due to a short term dip based upon sentiment.



Rolls-Royce @ 627.5p, -3.5 (-0.55%) as at 10:32.

Article links:

BAE: -  

- independent.co.uk: BAE warns of lower sales as UK and US cut spending

Rolls-Royce: - 
- selftrade.co.uk: Gates urges Senate to kill funding for F-35 engine
- sharecast.com: Broker snap: Rolls-Royce to see strong growth in 2011
- sharecast.com: Broker snap: Rolls upgraded but upside risk limited