LONDON (ShareCast) - BAE Systems (LSE: BA.L - news) ' shares are down more than 10% over the last month on concerns that a reduction
in military operations in Iraq and Afghanistan would depress orders, but Evolution Securities is bullish on the stock in the wake of the Paris air show.
Evolution investment analyst Nick Cunningham met with BAE's management at the air show and said the message from the top was 'strong visibility of long term profits in the UK, stability at high levels at worst in the US and very strong upside from the Saudi Typhoon programme.'
Cunningham points out that orders from the UK account for only 20% of sales, so fears over a decline in orders from the home market are overblown. Meanwhile, in the US 'binary negative risks on the FMTV truck programme are balanced by binary positive risks on the M-ATV for Afghanistan,' Cunningham observed.
In relation to its US peers BAE trades at a discount based on Evolution's projected 2010 earnings.
'Our sum of the parts valuation of around 440p still includes -25p of pension liability though most of that could be recovered from defence customers (think about regulated utilities). Our forecast includes little Saudi profit though, but we expect that to grow strongly and could add 50-60p to our 440p valuation. Together that could give over 500p a share,' Cunningham concludes.
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