The BAE Systems (LSE:BA.) share price is one of the biggest FTSE 100 gainers this year, and for good reason.

Results out this week show the UK defence giant is on track for a big uplift in annual profits. Countries continue to increase military orders with Russia’s war in Ukraine, and the recent conflict in Gaza.

The company manufactures fighter jets and submarines, among other large military equipment and machinery. It said it had logged £10bn of orders since the end of June 2023. That puts the group on track for more than £30bn in sales orders this year.

War footing

Last month I wrote how I picked up shares in Qinetiq Group. That’s one of the UK’s fastest-growing defence companies. Now I see potentially more value in its biggest rival.

And we’ve heard how the company’s business pipeline is booming. BAE Systems strategy director Steve Cardew told the market in August that global conflicts had spiked sales. Especially with the Russian invasion of Ukraine.

In July 2023 it signed a £280m weapons deal with the UK government. In September it boosted that supply with another £130m contract.

Shortly after, the US, UK and Australian governments announced they would spend £3.95bn on a new generation of submarines built by BAE Systems. These nuclear-powered subs are to back up a pact to counter China’s ambitions in the South Pacific.

That has led to BAE upgrading its guidance. Earnings per share will jump 10% to 12% in 2023, said chief exec Charles Woodburn.

24 years of dividend hikes

BAE shares come with a 25% higher price tag than at the turn of 2023. Quite the move for a £32bn company. And certainly for one of the world’s largest defence, aerospace and weapons manufacturers.

The thing that really gets me interested here is long-term value. When seeking compound growth — the eighth wonder of the world — consistency is key.

And BAE Systems has an incredible track record. Since this would be a long-term income stock for my SIPP, I like one specific fact. The company has improved its dividend per share every year since 1999.

Ignoring BAE Systems because it has repriced higher? That’s effectively saying I wouldn’t buy a company that is becoming more popular, and growing its revenue, profits and dividends.

What I’d pay

The downside, of course, of all this attention, is that shares are now trading at 16 times earnings — a healthy premium. But I see safety in numbers. Especially with the way the world is leaning these days.

If I’d have bought £10,000 worth of BAE shares in 2007 (£4.29 a share, 2331 shares), I’d have collected a modest 12.8p per share in dividends, worth £298.

That same £10,000 invested in 2022 would be worth £452.26 in dividends! Quite the uplift.

This, of course, doesn’t include the gain I’d have had from simply buying the stock 16 years ago and reinvesting dividends. By my calculations, if I’d have done that, my initial £10,000 of BAE shares would now be worth a tidy £50,403.67. So I can see the power of compounding, and time in the market.

I’ll leave the intraday trades and risky leveraged punts to others. I’ll stick to Britain’s best businesses for my long-term SIPP retirement stocks.

The post The BAE Systems share price is up on £30bn sales spike. Is it my next SIPP star? appeared first on The Twelfth Magpie.

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Tom Rodgers has positions in QinetiQ Group Plc. The Motley Fool UK has recommended BAE Systems and QinetiQ Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With investors rushing to buy UK defence stocks, one FTSE 250 growth star stands out to me.

I just bought Qinetiq (LSE:QQ) for my SIPP as a long-term compounder.

Qinetiq paid £43m to shareholders in 2022/23. The dividend per share is double what it was a decade ago. But there’s more.

BAE the best?

BAE Systems is one of the biggest stock market gainers from the West’s move to aid Ukraine with military support. It’s Britain’s largest defence company, after all.

It remains the UK’s most-searched for stock in 2023, according to Google Trends.

But with so many investors throwing their cash into BAE shares, I see the £10+ per share price as too high. Now I’d have to pay 17 times annual earnings for BAE.

Instead, my eyes alighted on a company a fraction of the size. QinetiQ is a £1.8bn market-cap defence specialist with £1.6bn in revenue. It has a solid and growing dividend, and humming net profits.

A Common Wealth report cited by The Guardian found Qinetiq pays just 4.5% of its own research and development costs. The rest is shouldered by increasing UK government support for aerospace and defence companies.

That’s led to a chunky 23.2% return on investor capital, reporters wrote.

Breakups are tough

So what are the major risks? A takeover or buyout seems most likely to top that list. Those deals don’t always work out best for the private investor.

In 2019, the UK government waved through the £4bn sale of British aerospace firm Cobham to a private equity giant.

Two years later, AIM-listed TP Group was taken out by Science Group for a song. The US engineering giant Parker-Hannifin Corp snapped up the £1.6bn-a-year revenue Meggitt in 2022.

That cleared out some of the largest UK rivals to Qinetiq. But defence is a global industry with massive players.

Where the upside lies

Qinetiq is a multinational with divisions in the Middle East, Australia, and the US.

Chief executive Steve Wadey said on 12 September that the war in Ukraine led to growing interest in its key technologies. These include using laser energy to target airborne threats.

The Ministry of Defence (MoD) also noted something very interesting last year: “QinetiQ…have built a phase-combined laser with the ability in the future to scale fire-power levels”.

Intellectual property and patents are critical to defence companies’ ability to turn potential into profit.

Qinetiq says its dividends will rise from today’s 7.7p per share to 8.59p by 2025.

The company’s inconsistency in upping these payouts may have dampened enthusiasm in the past. But I see a change in strategy here.

It is one of only three firms invited by the MoD to Porton Down in November last year. There it took part in the UK’s first high powered long-range laser weapons trial.

Defence stocks will be critical to managing the uncertain world ahead. I spy a long-term growth and dividend opportunity here, and that’s why I bought Qinetiq.

The post I just bought this FTSE 250 defence star as war breaks out appeared first on The Twelfth Magpie.

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Tom Rodgers has positions in QinetiQ Group Plc. The Motley Fool UK has recommended BAE Systems and QinetiQ Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

While I am willing to overlook a few holes in its balance sheet, I also know that many strong businesses have collapsed during tough economic periods. Here, I will look at the Rolls-Royce share price in detail to judge if the business is worth investing in before 2023. 

Can aviation boost Rolls-Royce shares?

Currently, the UK economy is under swirling clouds of uncertainty. The country is grappling with a huge energy crisis. In fact, reports show that the UK’s energy crisis is the worst in Western Europe. All of this has impacted how investors are looking at the market. 

This also has put an immense strain on businesses, including Rolls-Royce. The firm’s return to profitability in 2021 was a positive marker for investors. However, this already seems to have slowed down over 50% in the first half (H1) of 2022 with just £125m in profits.

The silver lining here is the return of air traffic. Rolls-Royce has already seen a spate of deals for its profitable engine upkeep business. Just today, a new venture with Air China to overhaul and maintain its sizable fleet was signed. 

While the latest crash in the Rolls-Royce share price is triggered by the health of the UK economy as a whole, the engineering firm is slowly looking to reverse recent fortunes.

Future focussed

The big reason why I am still slightly bullish on Rolls-Royce is because of the smart restructure. And the areas it’s exploring now have me buzzing. 

Energy and defence are a huge focus for the firm going forward. The invasion of Ukraine has derailed the energy sector and has countries in the region scrambling to improve defences. This has boosted both industries tremendously. 

And Rolls-Royce is set to play a big role in both. The firm’s small nuclear reactor project was given the green light by the UK government. The power systems division has seen its order book grow by 53% to £2.1bn. The second quarter (Q2) of 2022 especially saw a huge spike in sales. 

The other booming area for Rolls-Royce is defence. The company recently signed billion-dollar deals with the US, UK and German militaries. It holds a vast £6.5bn order book, which includes an 11-year contract to support the Adour engine, which powers UK’s Hawk jets. 

Concerns and verdict

Despite the large order books, profit margins have been falling. Its booming defence wing saw underlying profits fall 32% to £189m compared with H1 2021. The power systems also took a step back. H1 2021’s positive cash flow of £71m was reversed this year, with the sector bleeding out -£76m in H1 2022. 

The board chalked this up to high demand, increasing costs and supply chain challenges. But I think these figures will get worse thanks to rising commodity prices.

There is no denying the intrinsic value of Rolls-Royce shares at 77p. But right now, given the turbulence in the UK, I am waiting for 2022’s full-year reports before investing in Rolls-Royce shares. 

The post Should I snap up Rolls-Royce shares while they are still below £1? appeared first on The Twelfth Magpie.

More reading

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• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Investors in Rolls-Royce (LSE: RR) will not be happy looking at its performance this year. The stock has tumbled 33% as ongoing market concerns have crushed sentiment. The Rolls-Royce share price has also been held back by the crippling effects the pandemic has had on the civil aviation sector.

Yet the stock is showing signs that it can make a recovery as we head into the second half of the year and beyond. But will this be enough for its share price to take off? Let’s explore.

Increased defence spending

Rolls-Royce is set to benefit from the increased focus placed on defence spending in recent times. Its defence division is its second-largest generator of revenue. And with a renewed focus, fuelled by the conflict in Ukraine, the business has already noted a backlog of orders. It generated around 30% (£3.3bn) of its revenues from its defence segment last year. With demand looking set to continue to rise, this could provide Rolls-Royce with a boost.

The firm has also made large strides to become more streamlined. It trimmed its costs by starting a restructuring programme back in 2020. And this would have played a part in the £124m profit the group reported last year. On top of this, it’s also generating free cash flows again. These are all positive signs.

Rolls-Royce debt

What may hinder Rolls-Royce’s recovery is its debt. At the end of 2021, the firm had a net debt of £5.1bn. The recent £1.5bn sale of subsidiary ITP Aero to private equity firm Bain Capital will go some way towards alleviating the pressure. However, as interest rates continue to rise, this debt may become harding to service, bumping up costs for the business. This could have a damaging impact on the Rolls-Royce share price.

The company is also embroiled in a pay dispute with employees amid the cost-of-living crisis. Rolls-Royce recently offered a £2,000 cash lump sum to around 70% of its UK workforce, at a cost of around £45m. But this was rejected by Unite, the union representing workers, which is holding out for an offer more in line with the rate of inflation. Should Rolls-Royce have to increase wages further, this would squeeze the company’s profit margins.

A further issue for me is its high price-to-earnings (P/E) ratio. It currently trades on a P/E of 58. I think this shows the share price is not great value.

Can it recover?

So, can the Rolls-Royce share price recover in 2022 and beyond?

Well, I’m not sure. Increased recognition of defence spending should provide the firm with a boost. However, I think the stock’s price could be dragged down by the headwinds it faces in the near term regarding its pay dispute. Its large debt is also a concern for me. While I like Rolls-Royce, I’m holding out to see if its share price slides further before opening a position in my portfolio.

The post Will the Rolls-Royce share price recover in 2022? appeared first on The Twelfth Magpie.

More reading

• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Rolls-Royce (LSE:RR) shares are on a dismal run. After failing to recover from the recent travel bans, the company has struggled to reach pre-pandemic highs. And its restructuring efforts to counter losses, although promising, will take time to be profitable.

With the worst of the pandemic seemingly over, investors expected Rolls-Royce shares to recover quickly. Brief surges in July and October 2021 were encouraging signs at the time. But the economic windfalls from the pandemic seem to have pushed the company out of favour. 

Despite recording a £513m profit last year and securing new deals, the engineering firm has been spending a lot on R&D. The new defence and power projects are cash-intensive operations that will take years to develop.

This, coupled with the loss of some core employees, including CEO Warren East, are signs that the recovery could be laboured.

However, I have identified an exciting FTSE 100 engineering firm with a strong focus on defence that I think looks like a much better long-term option right now. Analysts expect governments to hike their already sky-high defence budgets in response to the war in Ukraine. And I think top stocks in this industry could be promising picks for my portfolio.

British defence giant

BAE Systems (LSE:BA) is the largest defence contractor in Europe and one of the top R&D companies in the sector. The company is the seventh-largest defence contractor in the world with partnerships with governments in the US, the UK, Germany and Australia. In defence, BAE Systems has established positions in the air, maritime, land and cyber domains.

In a trading update released today, the company highlighted several key deals. These include a contract for the management of the US Navy’s C5ISR systems and an 11-year contract to support the UK’s Royal Air Force Hawk fleet.

The company could also benefit strongly from the US’s new defence spending budget of $773bn. The country accounts for 46% of BAE’s sales and the new budget could further boost future revenue. Given tensions in the region, BAE expects defence spending in Europe to increase too.

The group’s outlook for 2022 remains positive. The board estimates a total sales boost of 2%-4% and underlying EPS growth of 4%-6%. Free cash flow in 2022 is set to exceed £1bn. This could help upgrade its 3.32% dividend yield.

And this financial stability is why BAE has outperformed Rolls-Royce in the market. In the last 12 months, Rolls-Royce shares are down 17.7% while BAE shares are up 51%. And BAE shares look much cheaper trading at a price-to-earnings (P/E) ratio of 13 times compared to RR’s P/E ratio of 57.

Some concerns and my verdict

With rising tensions, the UK government is keeping a close eye on the defence industry in the country. The bid for British firm Meggitt by US-based Parker Hannifin has come under government scrutiny on national security concerns. And since BAE works with governmental agencies across the world, rising tensions could force trade sanctions that would affect BAE’s revenue.

However, the company has a huge order book and is working on key defence tech for the future. The board is confident in delivering growth while maintaining dividends. And I think BAE shares are a much better long-term option for my portfolio than Rolls-Royce shares.

The post Forget Rolls-Royce shares! I’d buy this blue-chip stock instead appeared first on The Twelfth Magpie.

More reading

• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should today’s trading statement change this? I think so. Let me explain.

BAE: down but not out

Predictably, BAE has been impacted by the coronavirus during the second quarter of its financial year. Its UK-based Air and Maritime divisions were among the worst hit, although this was mitigated by “strong underlying operational performance and cost control measures”.

Across the pond, the FTSE 100 member’s Controls and Avionics business has also been affected and this could continue for a while. Demand has also been lower at its Power and Propulsion business and cybersecurity division.

On a brighter note, BAE does look to be getting back to work. Productivity levels at its defence businesses (which generate most of the firm’s revenue) “improved” in June. Although many are still operating from home, the company said that more than 90% of its staff were getting on with things.  

What about the outlook?

Here’s where things get interesting. According to BAE, sales are predicted to be “broadly stable year-on-year“, although profit over the first six months of 2020 is likely to be around 15% lower. That’s not great, but it’s not a disaster compared to what’s going on at other UK-listed stocks. 

Encouragingly, the company also said the performance in the second half of 2020 will be “much stronger” as operations return to full steam. The caveat, of course, is that this outlook could change rapidly in the event of a significant second wave of the coronavirus. 

Despite the disruption caused by the pandemic, BAE’s acquisition spree has not been impacted either. The $275m purchase of Raytheon’s Airborne Tactical Radios, revealed in January, completed last month. Another acquisition, Collins Aerospace’s Military Global Positioning System business, should be finalised “early in the second half“. 

On top of this, the £15bn cap is continuing to invest in new facilities as part of its growth strategy. It’s also trying to get its pension scheme in order, having recently “injected” £1bn.

This doesn’t sound like a company in crisis to me. 

A potential bargain then?

I’m tempted to think so, even if BAE’s shares were trading fairly flat today. Perhaps investors are more concerned over the possibility of a second coronavirus wave to see the green shoots in today’s statement.

Then again, there could also be some reluctance to buy given the uncertainty surrounding the company’s final dividend payment from the last financial year.

Back in April, BAE said that it would make a decision on this when half-year numbers are confirmed next month. Personally, I think there’s a fair chance of the dividend being paid based on this update.

Ultimately though, it shouldn’t matter. As we never tire of saying at the Fool UK, stocks should be purchased with the intention of holding on to them for the long term. Don’t let the tail wag the dog.

Bottom line on BAE

At a little less than 11 times earnings and considering its defensive qualities, I think BAE is something of a bargain right now. Hold it as part of a diversified portfolio and the eventual returns should make up for any near-term volatility. 

The post Fear another market crash? BAE Systems shares look a great buy to me! appeared first on The Twelfth Magpie.

More reading

• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• 1 FTSE stock tipped to handily outdo Rolls-Royce shares by 2027
• Forget SpaceX, here are 3 UK tech stocks to consider buying without the high price tag
• Should investors consider buying BAE Systems shares now they’re back below £20?
• BAE shares are falling: opportunity or warning?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m taking a look at whether these two dividend favourites have become too expensive after their recent gains?

Not just valuations

Utilities come to mind when I think of defensive dividend investing, and National Grid (LSE: NG) is probably the quintessential defensive stock. Being a natural monopoly in a heavily regulated industry means the company earns “rent-like” profits, which gives it visibility over long-term cash flows.

But following an 11% gain in its share price since the start of the year, and a fall in its dividend yield to 4.1%, has National Grid now become too expensive?

One big thing that’s been attracting investors to the stock is the company’s forthcoming special dividend. Following the sale of its 61% stake in its UK gas distribution business, the company has committed to paying shareholders a £3.2bn special dividend. This equates to a dividend of 84.375p per share, which is worth roughly 8% of its current share price. The stock is due to go ex-dividend on 22 May 2017, meaning new buyers still have time to buy shares in National Grid and be eligible to receive the special payout.

But even after subtracting the value of its forthcoming special dividend from its share price, National Grid trades on a pricey forward P/E ratio of 16 times. Usually, when a stock trades at such multiples on its future earnings, it implies that relatively high levels of growth are on the cards. However, City analysts expect earnings to grow by less than 5% in each of the next three years, with dividend growth of at least RPI inflation only after 11 for 12 share consolidation.

Moreover, it’s not just valuations that investors should be worried about. Government intervention in the energy market, particularly price controls, seems increasingly likely, and this could delay much needed investment in new generation capacity. If this were to happen, this would hurt growth in National Grid’s regulatory asset base and, therefore, earnings growth too.

Weighing up these factors, I reckon National Grid looks too expensive at these levels.

Pension concerns

Another stock which income investors should be wary of is BAE Systems (LSE: BA). The defence company has also enjoyed a significant share price gain over the past year. A former favourite of fund manager Neil Woodford, BAE shares have risen 31% over the past 52-weeks, with an 8% gain since the start of 2017.

That results in the stock now trading on a forward P/E ratio of 14.5 and dividends yielding 3.3% — which doesn’t seem especially expensive against the market. However, its valuations do seem pricey when compared to its historic norms, as its five-year historical forward P/E average is 11.8, with an average trailing dividend yield of 4.6%.

Investors also need to be wary of the BAE’s hefty pension deficit, which was the main reason behind Neil Woodford selling the £160m stake in the company last year. This is because the company may not have much cash left over to fund growth in its dividend payouts as it focuses on increasing pension contributions and reducing its leverage. And this implies that despite expectations of healthy high single-digit earnings growth over the next two years, dividend growth for the stock may languish in low single-digits.

Given the risks involved, I reckon the current yield of 3.3% looks a little disappointing.

The post Are these FTSE 100 dividend stocks getting too expensive? appeared first on The Twelfth Magpie.

More reading

• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• 1 FTSE stock tipped to handily outdo Rolls-Royce shares by 2027
• Down 15%! Is National Grid’s share price really a bargain right now?
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With this in mind, here are three beaten-down shares that I’m avoiding at the moment.

Dividend cut risk

First up is telecoms company Talktalk (LSE: TALK). The company’s share price has fallen by 19% over the past year, which compares unfavourably to the UK FTSE All-Share Index’s gain of 24%.

Talktalk has struggled to shake off the damage caused by the high-profile hacking scandal in 2015, and in order to win back customers, management has decided to rebrand the business. Talktalk is returning to its challenger roots by focusing on delivering value for money for its customers and keeping prices down. Signs of success are beginning to show too, with its churn rate falling to less than half the levels seen last year.

But looking forward, Talktalk faces margin pressure from higher costs due to rising investment needs and hikes in BT Openreach wholesale charges. Because of Talktalk’s more limited size and its new Fixed Low Price Plans, the company seems be in a weaker position than its rivals.

Moreover, Talktalk’s dividend policy seems unsustainable as city analysts expect its dividend cover to fall short of 0.7x this year. This indicates a dividend cut is likely to take place soon, and the risk of this happening will likely continue to weigh on Talktalk’s share price.

Difficult trading

Defence supplier Cobham (LSE: COB) isn’t doing any better. The company’s share price fell by 15% today after yet another profit warning — its fifth in the past 12 months.

Cobham said it now expects underlying trading profit for 2016 to be £225m, which represents a further reduction of £20m from its January guidance of £245m. It’s also well below the estimate of £290m from only three months ago.

There’s mounting uncertainty about its troubled contract with Boeing’s KC-46 tanker programme, and there is growing concern that Cobham may need another equity raise before long.

“The balance sheet is clearly not strong enough to properly support the operations of the group,” the company said in its press release today.

Regulatory risks

Shares in CFD provider Plus500 (LSE: PLUS) have barely recovered since the FCA announced plans to clamp down on the contracts for difference market in December.

New regulations could pose a bigger challenge for Plus500 than its larger rivals as regulation tends to hit smaller firms the hardest. Proposed changes to make it more difficult for Plus500 to acquire new customers and restrictions on marketing would have a greater impact on the company as it has relatively high churn rates.

Shares in Plus500 currently trade at eight times forward earnings this year. That doesn’t seem too demanding, but given expectations that profits will fall sharply under the proposed new regulations, I’m avoiding its shares for now.

The post 3 beaten-down shares I’m avoiding right now appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

However, with Trump widely seen as an erratic and unpredictable character, it’s unclear which sectors, and in particular which stocks, will genuinely benefit in the long run. With this in mind, I’m taking a look at whether Trump winners BAE Systems (LSE: BA) and Shire (LSE: SHP) can extend their earlier gains.

More defence spending?

Defence stocks, such as BAE Systems have been flying high, and on the surface, it makes a lot of sense. Trump has pledged to strengthen the military, with particular emphasis on traditional military firepower – a larger army, more navy ships, more fighter aircraft and better nuclear and missile defence capabilities. Defence analysts reckon that if he follows through on what he’s promised, his defence initiatives would add more than $50bn to the US defence budget annually.

With the Republicans maintaining control of Congress, you’d think that Trump is in a strong position to deliver on more defence spending. However, things are never as simple as they seem. The Republicans have a smaller majority in the House than in 2014, and Senate Democrats could still filibuster everything.

In addition, Trump is relying on unrealistic cost savings and efficiency improvement to deliver what he’s promised and has many competing pledges, ranging from increasing infrastructure spending to cutting taxes and reducing the national debt – all of which will no doubt compete for funding.

BAE, which derives 36% of its revenues from the US, may also be hit by Trump’s protectionist views. He’s pledged to bring back jobs to America, and would likely favour US contractors over foreign ones.

Despite this, shares in BAE are up 10.2% in just a week, and currently trade at 14 times expected earnings this year. This forward price-to-earnings multiple is below its five-year historical average of 18.1, which indicates shares in BAE still seem undervalued despite recent gains. 

Policy uncertainty

Trump’s election win has been good news for healthcare stocks and one of the top performers in the London market has been Shire, a biotechnology company that focuses on rare diseases. Shire gets nearly all of its revenues from the US, so it’s no surprise that the stock is more sensitive to potential US policy shifts than GlaxoSmithKline or AstraZeneca.

While both candidates were critical of high drug prices, Trump has been less vocal on measures to regulate prices and has been more supportive of deregulation. This could cut development costs and speed up the approval process – and boost profits for the sector. Nevertheless, he hasn’t given any specifics on his health plan yet, and the potential long-term benefit for the sector remains to be seen.

Shares in Shire already gained 9.9% this week, and currently trade at a forward P/E of 11.4. Although this is significantly below its five-year historical average of 20.8, the firm’s recent disappointing haemophilia drug sales figures point towards slowing earnings growth in the near term.

The post Can these Trump winners extend their gains? appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

However, investors need not avoid stocks altogether. Whatever the election result may be, there will be winners and losers. Some industries may even do well under both election scenarios and investors need to bear in mind that no two stocks are the same.

Strong support for defence

The defence industry is one such industry that should continue to thrive no matter who takes the White House next week. With global conflicts on the up and rising geopolitical tensions, both candidates have signalled strong support for more defence spending.

This means BAE Systems (LSE: BA) stands to benefit from the likely post-election increase in the defence budget. The British defence company is the eighth largest supplier to the US Department of Defence and derives 36% of its revenues from the US. It’s also particularly well placed to benefit from further spending trends because it has been expanding into new areas, not just in electronic warfare, but also surveillance and cyber security.

However, investors ought to keep a close eye on potential developments in the Middle East. The supply of military hardware to Saudi Arabia has come under renewed scrutiny following the kingdom’s recent attacks on Yemen. And as Saudi Arabia is BAE’s third largest customer, accounting for 21% of group revenues, any potential ban on sales could have serious repercussions on BAE’s profitability.

BAE currently expects to deliver a 5%-10% rise in underlying earnings per share this year, and shares currently trade at 13.7 times its expected earnings this year.

Better off with Trump?

Meanwhile, G4S (LSE: GFS) could stand to become a major beneficiary from Trump’s proposed immigration policy shift. His strong rhetoric on immigration and his pledge to deport an estimated 11m undocumented immigrants in the US may be a boon for G4S’s security and prison services.

The security company is doing well as things stand. Yesterday, it said it had won new contracts with annual revenues of £1bn and total contract values of £2bn since the start of the year. Also, revenues from continuing operations in the first nine months of 2016 grew by 5.7% year-on-year, to £4.82bn.

These latest figures show the company’s focus on organic growth and cutting costs is beginning to work and G4S is clearly putting past controversies behind it and moving on. Shares in the company currently trade at 14.5 times its expected earnings this year, based on analysts expectations of a 4% rise in underlying EPS in 2016. G4S is also attractive from an income standpoint, with shares trading at a prospective yield of 4.3% this year, with forecasts of dividend growth of 3%.

The post 2 stocks I’d buy before the US election appeared first on The Twelfth Magpie.

More reading

• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• 1 FTSE stock tipped to handily outdo Rolls-Royce shares by 2027
• Forget SpaceX, here are 3 UK tech stocks to consider buying without the high price tag
• Should investors consider buying BAE Systems shares now they’re back below £20?
• BAE shares are falling: opportunity or warning?

Jack Tang has a position in BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.