Thursday 20 February 2014

BAE Systems could be in for a bumpy ride as it reports full-year results

BAE Systems
BAE disappointed investors when it revealed a £6bn deal to sell fighter jets to the UAE had fallen through. Photograph: Danny Lawson/PA Archive/Press Association Images
Investors will be wary of reverberations from last week's profits warning from Rolls-Royce when fellow defence contractor BAE Systems reports full-year results on Thursday.
BAE's shares were dragged down in Rolls-Royce's wake last Thursday when £3bn was wiped off the engine maker's market value following the announcement. Rolls-Royce shocked the market when it largely blamed US and UK defence cuts for an end to 10 years of unbroken growth this year.
An industry analyst at broker Charles Stanley, Tina Cook, said: "After Rolls-Royce, people will be watching what defence suppliers say very closely."
Rolls-Royce, which makes most of its money from civil aviation, had failed to alert investors to the coming slowdown at its defence division. By contrast, BAE, which relies far more on defence sales, has prepared shareholders for the impact of spending cuts in the US where it makes 40% of revenues.
The other question for BAE is whether it has successfully renegotiated a long-standing deal with Saudi Arabia. The company warned in October that if agreement was not reached by results day it would knock 6p or 7p off 2013 earnings per share.
Cook said: "It's been clear in the case of BAE Systems that they would come under pressure from US and UK defence cuts because they are their important markets, but in light of what has happened at Rolls-Royce's defence division people will still want to hear about that.
"The big focus for BAE Systems is going to be about the Saudi renegotiation. The market has not heard definitively either way since their disclosure in October."
Analysts expect earnings to rise 9.5% to 42.6p a share if the Saudi renegotiation is included in 2013 numbers. Otherwise, annual earnings are set to fall.
BAE disappointed investors in December when it revealed that a £6bn deal to sell fighter jets to the United Arab Emirates had fallen through. The same day it announced that talks to renegotiate the 2007 deal with Saudi Arabia would drag on into this calendar year.

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