EUR 850.00 For Business Accounts Only

Morningstar | BAESY Updated Forecasts and Estimates from 30 Nov 2018

BAE is among the largest defence contractors in the world and is one of the six largest suppliers to the U.S. Department of Defense. The United Kingdom promotes BAE as a national champion in crucial areas such as aircraft carriers, naval vessels, submarines, armoured fighting vehicles, general munitions, and network-enabled capability. As a dominant--and, in many instances, the only--player in these markets, BAE enjoys an unbeatable advantage. For example, BAE is the lead contractor for the Queen Elizabeth class of aircraft carriers, the first of which was completed in 2014. BAE's 17% exposure to the United States' $400 billion F-35 programme will support earnings for years to come. Total procurement worldwide is expected to be in excess of 3,100 aircraft. The firm will benefit from increasing defense budgets around the globe, but intense competition in international markets could dilute some of BAE's advantages.The F-35 Lightning II Programme is ramping up, including BAE’s U.K.-based production of rear fuselage assemblies and deliveries of the electronic warfare suite from BAE’s U.S. business. We expect yearly production deliveries of roughly 100 in 2018, with an increase in 2019 and 2020 as the F-35 moves into full-rate production, and as U.S. defense budget growth under a Trump administration starts to come through in outlays to contractors. BAE generates approximately 40% of its revenue from the U.S.Together with General Dynamics, BAE dominates the U.S. high-end defence land combat market. However, BAE’s competitive position in U.S. aircraft and naval domains is less strong, as the firm is mainly a subcontractor for large U.S. defence players focused on manpower-related services. Profit margins for providing staffing for U.S. defence services are only close to 8%, depressing BAE's group margins.BAE combines internal growth with acquisitions and portfolio shaping to deliver shareholder returns in the form of share buybacks and increasing dividends. The firm is diversifying its book of business to cyber and commercial, which we expect to generate growth for the firm.