Tuesday, December 12, 2017

A current AIM International Fund Holding: BAE Systems (BAESY) by Matthew Holland

BAE Systems plc Sponsored ADR (BAESY, $30.92): “BAE Systems Continues to Battle”
By: Matthew Holland, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

BAE Systems plc Sponsored ADR (NYSE:BAESY) is a global defense, aerospace, and security company headquartered in London, United Kingdom.  BAESY offers products and services to air, land, and naval forces, as well as advanced electronics, security, information technology solutions and support services.

• BAESY’s recently signed contracts provide stable revenue growth.

• The global cybersecurity market is expected to see strong growth.

• Opportunities exist in the growing Unmanned Ground Vehicle (UGV) market.

• New technology could help drive growth.        
Key points: As a key player in the defense market, BAESY has shown the propensity to grow through new contracts.  In July 2017, BAESY entered into a contract with Goriziane Group SpA.  They will provide them with BvS10s, BAESY’s latest all terrain armored vehicle.  Later that month, they signed a contract with The Solent Local Enterprise Partnership.  As part of this contract, BAESY will design and deliver the UK’s first dedicated autonomous systems testing service.  These contracts, as well as additional contracts BAESY’s impressive research and development department can generate, will help drive growth.

An expanding global cybersecurity market will continue to create opportunities for BAESY.  The global cybersecurity market is expected to increase to $18.5 billion by 2026, representing a CAGR of 4.5%. North America and Europe are expected to account for 57% and 12% of that growth, respectively.  As the United Kingdom and the United States represent BAESY’s two largest markets, BAESY should be able to generate incremental revenue from this trend.

In addition to the global cybersecurity market, the UGV market is expected to see growth.  Increasing threats globally posed by rebels, hostile nations, and terrorist groups has created additional demand for UGVs.  This market is expected to grow to $707.8 million by 2026, representing a CAGR of 4.8%.  Again, this growth is expected to be driven by demand in North America (54%) and Europe (22.9%).  BAESY should be able to utilize their position as an experienced player in this market to capitalize on this expanding market.

Lastly, BAESY’s impressive research and development department can continue to generate contracts through impressive product development.  With a research and development costs representing nearly 8% or their revenue, BAESY is committed to bringing the most innovative and highest quality products to market.  Recently, this has provided them a contract to develop the Eagle Passive Active Warning Survivability System, an all-digital electronic warfare system, for the U.S. Air Force’s F-15 aircraft.  Additionally, in July 2017, they introduced Bluetooth-enabled sensors to detect stress and strain on bridges for tanks.  BAESY’s capability to generate revenues through the implementation of their innovative products and systems provides promise for future prospects.

What has the stock done lately?

Since the beginning of 2017, BAESY’s stock price has increased by 4.23%.  BAESY also paid a $0.44 dividend in October 2017.

Past Year Performance: BAESY’s stock price has increased by 15.63% over the past year.  After a solid performance over the past year, management still expects EPS to increase by 5-10% compared last year.

Source: FactSet

My Takeaway

BAESY has been respectable of late, and they have promising opportunities on the horizon.  Contracts with Goriziane Group SpA and The Solent Local Enterprise Partnership provide solid sources of revenue.  Furthermore, growth in the global cybersecurity and UGV markets provide promising growth opportunities.  Lastly, a strong research and development department can provide long-term growth capabilities, as seen by recent offerings.  While a relatively high debt level raises some concerns, BAESY appears to have opportunities on the horizon to service this debt.  Thus, it is recommended BAESY remain in the AIM International Equity Fund.