An upgrade to guidance following a strong first half sent shares in BAE Systems (BA.) up 2 per cent. <\/p>\n
Including contributions from equity investments, the group\u2019s sales rose by 9 per cent, and underlying earnings were up 11 per cent. This led it to increase revenue and underlying operating profit guidance by a percentage point each. It now expects revenue to grow by 8-10 per cent, and underlying operating profit by 9-11 per cent. <\/p>\n
The real positive surprise came with its cash flow. It has smashed through prior guidance of generating \u00a31.3bn this year, bringing in \u00a31.8bn in the first half. This \u201creflected a high level of customer advances\u201d during the period, management said.<\/p>\n
Orders rose by nearly a quarter and ran ahead of sales. Chief financial officer Brad Greve said European sales rose by 30 per cent in the first half, reflecting the increased spending commitments made by governments. <\/p>\n
In the UK, where BAE generates a quarter of sales, chief executive Charles Woodburn welcomed the commitment to spend nearly \u00a3300bn over the next four years through the defence investment plan<\/a>, which will bring defence spending to 2.7 per cent of GDP.<\/p>\n \u201cI think what we\u2019re all looking to see is a clear pathway to meeting the Nato commitment of 3.5 per cent. But the prime minister has said that he will meet that commitment.\u201d <\/p>\n Indeed, BAE\u2019s management announced the half-year results from the group\u2019s base in Barrow-in-Furness, where new PM Andy Burnham and defence secretary Wes Streeting were in town to sign a \u00a35.9bn contract for work on new Dreadnought-class submarines.<\/p>\n \u201cThe fact that he\u2019s here \u2013 10 days into the job \u2013 with Wes Streeting, the defence secretary, says a lot about their commitment for defence,\u201d Woodburn said.<\/p>\n The strong cash flow generation has also meant better returns for shareholders. Buybacks were up 10 per cent to \u00a3933mn in the first half, and the interim dividend was lifted by 11 per cent to 15p.<\/p>\n Our caution on BAE Systems shares in recent times has been centred around valuation. Shares hit an all-time high in the early weeks of the war in Iran, but they\u2019ve pulled back by about 15 per cent since. <\/p>\n At 25 times forecast earnings, the shares are certainly not cheap, but the company is an indispensable part of Europe\u2019s key rearmament plan, and we expect upgrades to the already strong consensus earnings forecasts. Buy.<\/p>\n