Most aerospace and defense (A&D) companies typically receive a large portion of their revenues from US-allied governments
Investing in industry usually leads to heated debates on ethical issues. Many exchange-traded funds (ETFs) that focus on environmental, social and governance (ESG) criteria tend to avoid stocks in the industry entirely.
Today we will discuss two UK-based global A&D groups for investors who may be interested in the industry, particularly for diversification. The two names are BAE Systems PLC (LON :), (OTC :), a member of the and Meggitt (LON :), (OTC :), a member of the.
1. BAE Systems
London-based BAE Systems provides aerospace, defense and security solutions worldwide. With nearly 90,000 employees, its reach extends to 40 countries.
Year-to-date (YTD), shares of BAES are down about 10%. On December 29, they closed at 503.2p ($ 27.53 for US-domiciled shares). The current stock price supports a 4.5% dividend yield.
BAE Systems Weekly Chart.
The group released results in late July, followed by a trade update in November. Some of the main clients include the US, UK, Australia, Continental European countries, Qatar, and Saudi Arabia.
Semi-annual sales were £ 9.2 billion (or $ 12.4 billion), up 6% year-on-year (yoy). Operating profit was £ 808 million (or $ 1.09 billion), down 10%. Management's projected free cash flow for the full year was £ 800 million (or $ 1.08 billion).
The most recent trade update emphasized the importance of US operations, saying:
“In the US, the US-based portfolio of the Group & # 39; remains well aligned with client's priorities and growth areas, which we expect to continue under the next administration … [The] backlog provides good prospects for growth in the US company. The two-year budget deal passed in 2019 brought about $ 740 billion in defense spending for fiscal year 2021. "
The expected price / earnings ratio and the price / earnings ratio of the BAES stock are 10.67 and 0.89 respectively. Buy-and-hold investors can find value at the current price level.
2. Meggitt
Meggitt specializes in components and subsystems for the aerospace, defense, and energy markets. It employs more than 9,000 people in 16 countries.
So far in the year, the share of MGGT has fallen by about 29%. On December 29, it closed at 474.3p ($ 13.10 for US stocks). Earlier in March, the group cut its dividend in an attempt to strengthen its balance sheet.
The pandemic has had a greater impact on Meggitt than on BAE Systems, as the aerospace division generates more than half of Meggitt's revenues. The segment – which includes civil aircraft, corporate jets, helicopters, engines and parts – is under severe pressure due to lockdowns and various aviation restrictions.
Meggitt released results in September, followed by trade updates in November.
First half sales (H1) were £ 384 million (or $ 519 million), down 25% year-on-year. The pre-tax group loss was £ 368.4 million (or $ 498 million). In H1 2019, it had posted a profit of £ 72.6 million (or $ 98.1 million).
CEO Tony Wood commented:
" For the full year, we expect to achieve underlying operating profit between £ 180 million and £ 200 million, free cash flow positive in the second half and cash flow neutral for the full year at the top of the range of operating profit. "
The expected price / earnings ratio and price / earnings ratio of MGGT shares are 19.12 and 1.75 respectively. While we appreciate the long-term outlook for the Meggitt, we think the stock is still on the frothy side. So we would wait and observe the developments in the first quarter of 2021 before buying the shares. A potential drop of about 5% -7% would improve the margin of safety for buy-and-hold investors.
Bottom Line
Potential investors who are unwilling to invest capital in individual stocks in the sector may also consider buying ETFs. Examples are:
iShares U.S. Aerospace & Defense ETF (NYSE 🙂 – down 14.5% on YTD (discussed here)
Buy Space ETF (NYSE 🙂 – down 2.2% YTD
SPDR® S&P Aerospace & Defense ETF (NYSE 🙂 – up 4.4% YTD
SPDR S&P Kensho Final Frontiers (NYSE 🙂 – Up 6.1% YTD
Several aerospace and defense stocks of interest that are currently managed by these funds are:
Aerojet Rocketdyne (NYSE 🙂
Boeing (NYSE 🙂
Iridium Communications (NASDAQ 🙂
Lockheed Martin (NYSE 🙂
Maxar Technologies (NYSE 🙂
Mercury Systems (NASDAQ 🙂
Northrop Grumman (NYSE 🙂
Orbcomm (NASDAQ 🙂
Raytheon (NYSE 🙂
Teledyne (NYSE 🙂 and
Transdigm (NYSE 🙂
