BAE Forges Forward

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No one in their right mind ever said that business is easy.  Even the biggest and best of companies suffer the slings and arrows of misfortune.  BAE Systems (LSE:BA.) is an example.

Despite less than spectacular results for 2012, investors showed confidence in BAE today, boosting the company’s share price by 5.1% to 349.1.  Shareholder confidence is probably more closely related to the announcement of  the company’s plans for a £1 billion buyback plan and an increased dividend.

The dividend increase of 4% to 19.5 pence per share would be welcomed by investors at any time.  The buyback plan is to commence immediately, is expected to last three years, and will be capped at £1 billion.

BAE’s 2012 results weren’t all that bad, considering that their decline in sales and EBITDA was less than anticipated.  On the other hand it’s kind of like an Arsenal fan feels after a 5-4 loss to Man U after they had expected to lose by a five goal margin.  Sales declined .07% from £19,154 million to £17,834 million.  EBITDA dropped from £2,025 million to £1,895 million.  On the other hand cash flow increased from £634 million to £2,692 million and  net cash improved from (£1,439) to £387 million.

Order backlog increased 8% to £42.4 billion and order intake, excluding the UK and the US, increase from £4.8 billion to £11.2 billion.

Perhaps the greater concern is what to expect from the UK and the US moving forward as it appears more and more certain that BAE may suffer from defense spending cutbacks from both of its key customers.  The company has already announced that its maintenance contracts may be on the chopping block in the US, which could put some 3,500 employees out of work at major US naval ports.  Whilst there may be regulatory and rational business reasons for announcing the potential layoffs, it also casts a pallor over employee enthusiasm.  Not that they are so uninformed as to not understand the sorry state of the US economy would affect them sooner or later.

Frankly, and I do not make this statement lightly, the best thing that could happen to BAE is for a war to break out that would boost their order book.  Given the current military situation in Syria, the potential economic collapse of Egypt, and the growing complexity of political, economic, and military threats across the entire Middle East, the demand for BAE products and services could escalate at almost any time.

In the meantime, it is apparent that the company has a clear understanding of what problems it may be facing and has the capability to keep the ship afloat.

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