THOUGHTS: BAE Systems--Underpriced Giant?

Price: 427.2

BAE Systems has had something of a torrid time recently with the increasingly dwindling defence expenditure of the US and UK--still their biggest customers. As a result, the share price has been rather depressed recently.

Since the start of 2014, indeed, in general the price has been heading south. Nonetheless, recently it has been recovering somewhat. Consequently, I have taken a look at it to see what the figures suggests.

Fairly Generous P/E Ratio

The price to earnings ratio going forward seems pretty generous. Currently, the consensus earnings pers share (EPS) figure suggests a P/E of around 10.8. For 2015 the EPS is not expected to increase greatly with analysts predicting a forward P/E of 10.5. Although clearly this static growth is not ideal, clearly BAE Systems is looking like a bargain with the price just over 10 times earnings.

What is more, even the lowest EPS predictions yield P/E ratios which do not strecth the value of BAE too much. Here they are for 2014:

	EPS	P/E Ratio
	39.4	10.84
High	47.5	8.99
Low	34.23	12.48
Difference (%)	35.66

I would still be fairly happy with a P/E of just over 12. What is more, for 2015 analysts seem to predict there will still be some growth of note in EPS figures:

	EPS	P/E Ratio
	40.67	10.50
High	49.3	8.67
Low	35.89	11.90
Difference (%)	34.54

Here even the lowest EPS yields a P/E of under 12. Again, this is highly attractive for a company of the quality of BAE. 

Consistent Dividend

What is even more encouraging is the prediction of a consistent and well-covered dividend yield. For 2014 the analyst consensus is 20.59p per share and for 2015 it is 21.14p per share. This is a yield of 4.82% and 4.95% for 2014 and 2015. 

It is interesting to note, as well, that the consensus on the dividend has in the last week or so started growing. Hopefully this reflects a growing confidence in the short-term prospects in BAE.

What is more, the cover--even at the lowest EPS predictions--is 1.66 times earnings for 2014 and 1.7 for 2015. This is above the 1.6 times which I am happy with in the short term. For the consensus EPS the dividend cover is an excellent 1.91 times and 1.92 times. 

This is very close to the 2 times earnings dividend cover that shows a very well covered dividend indeed. As such, I feel pretty confident that the dividend should not be threatened anytime particularly soon. Although you always have to be wary.

One To Watch...

I plan to continue to keep an eye on BAE Systems. The price dropped below 400p back in mid-April (after the ex-dividend date for the final dividend) and I do wonder whether the continued uncertainty about defence contracts will bring it down once again soon. However, if the next stimulus for a drop is not until the next ex-dividend date we will have to wait until October.

I plan to look more deeply when I get a moment to see what BAE are doing--if anything--to counter this scaling back in one income stream. If their plans seem intelligent it may be a perfect time to jump on board.

What Do You Think?

Does BAE Systems attract your interest or are you waiting for the defence sector in general to improve in health a little?