Morningstar | No Surprises in BAE's 3Q Update
BAE's third-quarter trading update brought no major surprises. We are maintaining our narrow moat rating and GBX 630 and $33 fair value estimates for the local and ADR shares, respectively.Management reaffirmed 2018 guidance of a flat underlying earnings performance, against consensus expectations of a modest decline. Looking into the current quarter, the company is looking to benefit from a potential win by Lockheed Martin in Canada on a contract for the Canadian Surface Combatant Program.
The United Kingdom is an important end market for the company, and the details of Brexit remain a larger uncertainty; however, the company has little UK-EU direct trading exposure to the U.K. and the European Union. It also doesn't have outsize personnel risk with respect to EU nationals in the company's U.K. business. Separately, the company is working to right earlier missteps with respect to the first ship in the Offshore and Petrol Vessels program, expecting to start sea trials with the second ship in November. The first ship had some 100 defects, leading to a GBP 15 million charge.
In the U.S., the government cleared the 2019 defense appropriations bill in September, supportive of the company's medium-term outlook with respect to its exposure to the F-35 program, precision-weapons systems, and other U.S. programs.
BAE Systems is a defense, aerospace and security solutions provider. Co. supplies defense equipment, electronics and services, and cyber, intelligence and security solutions for governments and commercial markets. Co.'s offerings include the: manufacture of Typhoon assemblies for European partner nations and other export customers; design and manufacture of sub-assemblies in the U.K. and provision of equipment in the U.S.; development of future air system capabilities, including unmanned air systems; maintenance, support and training for Typhoon aircraft in service with the U.K. and Saudi Arabian air forces; and design, manufacture and support of defense and commercial avionics equipment.
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