Best form of attack is defence
DeFeNCe and security remains at the top of the political agenda, with troublespots from Ukraine to Iraq, Syria to Gaza – plus tensions around the South China Sea.
The need for security among sovereign nations leads Western and overseas powers to spend heavily on military equipment.
Britain boasts a powerful defence manufacturing industry, with armsmakers building everything from tanks and warships to sophisticated electronic surveillance equipment and complex combat jets such as the eurofighter Typhoon.
last year Uk defence and security exports totalled £ 13bn, of which almost £10bn was for defence equipment, representing a significant part of the economy and featuring a host of blue-chip quoted companies. Some 55pc of exports go to the Middle east, 23pc to North america and 10pc to asia Pacific, according to trade body aDS.
By way of context, defence firms have been hard hit by British military spending cuts following the Strategy Defence and Security review of 2010.
The fallout from this government spending plan still lingers, with the industry only just hitting the bottom of the cycle.
Nevertheless, experts say there is light at the end of the tunnel.
howard Wheeldon, an independent defence analyst, says: ‘The i ndustry has once again been forced to adapt and it comes out of this deep cycle of cuts leaner, fitter, more competitive and with a larger and more diverse range of products and services.
‘having reached the bottom in 2014 the immediate outlook for defence is stronger than at any time over the past five years.’
Of course, some investors avoid putting their savings into the sector, preferring to seek more ethical alternatives to companies making weapons to kill people. But for those in search of returns no matter, there are a few options to gain exposure to Uk-listed defence stocks.
The obvious place to start is with Britain’s biggest defence contractor, Bae Systems – the successor to what was British aerospace.
having failed in an attempt to merge with european giant eaDS (now airbus) almost two years ago, Bae (up 2.3p at 438p) has found itself facing an adverse defence budget outlook with the Uk and US its two biggest customers.
harry Breach, at Westhouse Securities, rates Bae shares a ‘sell’ due largely to his cautious view on US military spending as the world’s policeman recovers after long campaigns in Iraq and afghanistan.
The group’s book-to-bill – the value of incoming orders versus those shipped – was the lowest for any six-month period since Bae began disclosing its order intake in 2006, according to Breach, who gives the stock a 360p target.
however, espirito Santo Investment Bank rates the shares a ‘buy’ with a price target of 510p. analyst edward Stacey says there is ‘plenty of upside’ if the company can demonstrate sales have hit bottom and earnings will grow from here.
another interesting business is Cobham (up 1.6p to 295.1p) an his- toric aerospace firm celebrating its 80th anniversary this year. Some years ago management adopted a more cautious outlook on defence spending and diversified into other areas, yet to translate into faster revenue and profit growth, according to Rami Myerson at Investec Securities.
Myerson rates the shares ‘reduce’ with a target price of 290p because he’s concerned margin compression could mitigate the benefits of a recovery in revenue growth in 2015 and beyond.
Those investors keen to gain exposure to defence technology could take a serious look at QinetiQ (up 2.2p at 209.8p), the former defence research establishment that was the model for ‘Q’ in the James Bond films. It has recently sold off its US services division and continues to be supported by longterm partnering deals with the Uk Ministry of Defence.
Don’t rule out Rolls-Royce, a major supplier of engines to the defence sector. Margins have been expanding in the defence business and shares currently stand at 1051p.
Other analysts like GkN (up 2.3p at 340.1p) as the pick of the Ukquoted defence firms. The aircraft parts-maker’s military operations have struggled but the commercial business is booming.