Is Now the Time to Buy BAE Systems?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at BAE Systems  (LSE: BA.L  ) (NASDAQOTH: BAESY) to determine whether you should consider buying the shares at 310 pence.

I am assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look like a good value when compared against its competitors?
  • Price Earnings Growth (PEG): Does the share look like a good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock

Price

3-year EPS growth

Projected P/E

PEG

Yield

3-year dividend growth

Dividend cover

BAE Systems 310p 14% 7.7 N/A 6.2% 18% 2.4

The consensus analyst estimate for this year's earnings per share is 40.3 pence (12.5% fall) and dividend per share is 19.4 pence (3.2% growth).

Despite many analysts predicting a fall in earnings this year, BAE's latest update stated: "[Modest] growth in underlying earnings per share is anticipated for 2012, assuming a satisfactory conclusion to the pricing negotiations this year with the Saudi Arabian government on the Typhoon Salam program."

Anyway, trading on a projected P/E of 7.7, BAE appears to be cheaper than its peers in the aerospace and defense sector, who are currently trading on an average P/E of 10.5. However, BAE's P/E ratio and negative growth rate gives a PEG ratio of less than zero. With a negative result, the PEG ratio cannot help with my analysis.

Supporting a 6.2% yield, the dividend is above average for the sector, with the aerospace and defense sector average currently at 2.5%. BAE has a three-year compounded dividend growth rate of 18%.

Indeed, the dividend is two-and-a-half times covered, giving BAE room for further payout growth.

BAE has a strong yield but growth is slowing
In my view, BAE has become oversold due to worries about low defense spending in the U.S. and U.K. However, BAE is focused on expanding its global customer base to diversify from its traditional customers and dilute the spending fears.

International customers, such as Saudi Arabia, are increasingly become an important part of BAE. Indeed, even with slowing defense spending in the developed world, BAE has a significant order backlog totaling $40 billion.

BAE is focused on selling non-core assets, making strategic acquisitions, expanding into new markets, improving margins and reducing debt. Indeed, BAE reported within its latest results that it had slashed its borrowings by 10%.

The attempted merger with EADS has rekindled talk of consolidation in the sector. However, following stiff shareholder opposition, I believe it is unlikely BAE will see another merger or take-over attempt. BAE has also said it won't sell its U.S. division, which contributes more than half of the company's revenues.

Anyway, with a strong dividend yield and low prospective P/E overall, I believe now looks to be a good time to buy BAE at 310 pence.

More FTSE opportunities
As well as BAE, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held by Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But please hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

Rupert Hargreaves does not own any share mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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