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BAE Systems, Europe’s largest defence contractor, warned investors to expect little sales growth this year given government budget cuts and delays in US purchases because of the presidential election.
Any growth in earnings per share is expected to hinge on the company signing an expanded deal to supply Saudi Arabia with more Eurofighter Typhoon fighter jets.
“While little sales growth can be expected for the group in 2012 in the current market conditions, modest growth in underlying earnings per share is anticipated, assuming a satisfactory conclusion to Salam negotiations in 2012,” the company said in a trading update on Wednesday.
Salam, BAE’s deal to sell Eurofighter Typhoon fighters to Saudi Arabia, is one of the company’s most important export contracts, worth £4.5bn.
The order is for 72 jets, of which 24 have already been delivered. BAE said in January it was in negotiations with the kingdom to broaden the contract. That would increase the value of the deal, but has also delayed its closing as BAE and the kingdom try to agree the new price tag.
The delay in closing the deal did not worry analysts who believe it should eventually add £500m to BAE coffers. But Nick Cunningham of Agency Partners noted BAE was unlikely to start any share buybacks until it was done.
In contrast to the growing opportunities in Saudi Arabia, BAE voiced caution in its biggest market. It warned selling to US was likely to get more difficult as the year progressed towards November’s presidential election.
But the biggest rain cloud – one that would cause mayham for the industry as a whole – is the threat of sequestration. This would happen in January if US lawmakers were unable to agree a budget for 2013 and would mean an additional cut of $500bn over 10 years to the US defence budget.
Overall, BAE’s balance sheet looks comfortable, with the relatively small additional pension contribution of £200m over five years BAE announced on Wednesday leaving plenty of room for buybacks.
BAE’s trading statement shows just how tough a new world it now inhabits. The US will make for a hair-raising ride this year as politicians take budget negotiations to the wire. For BAE that means share prices are likely to remain depressed until the threat is lifted. The finalisation of the Saudi deal is widely expected but it may give some upside when it finally happens, though it is unlikely to outweigh the reality of a dreadful European sales market and a scary US one. BAE’s p/e of 8 may not be as high as Lockheed’s, but nor is it low enough given all the headwind to make it a salivating buying opportunity.