Great results, but BAE Systems beats retreat

With sales and profits ahead of expectations, the new boss of BAE Systems couldn't have asked for a kinder introduction to the results-day hot seat. Share price reaction has been mixed, however, and after making a three-week high in early trade, the price quickly hit reverse thrust.

Charles Woodburn took over from Ian King on 1 July, bringing experience of managing large projects after more than 20 years in the oil and gas industry. He has stepped up from chief operating officer, having joined the defence group from oil field services business Expro Group in May 2016.

Whether the defence industry outsider is able to capitalise on his favourable start depends on how he handles a broad range of issues, from maintaining production rates on Typhoon fighter jets to accelerating growth in cyber security.

There were no major surprises or changes in tone in today's results, with Woodburn content to highlight BAE's "sound platform for medium-term growth", the drive for efficiency and its "clear and consistent strategy".

Of course, one factor working in BAE's favour is Donald Trump's spending commitment towards stronger defence forces and capabilities. The US is a market in which BAE generates about 35% of its sales, with the company boasting a leadership position in the US electronic warfare market.

The defence spending trend seen in the United States is being replicated in other markets, BAE added. "Despite economic and political uncertainties, governments in our major markets continue to prioritise defence and security, with strong demand for our capabilities."

UBS noted that today's results were better than expected, with underlying earnings of £945 million 11% higher than a year earlier and 5% stronger than consensus, helped by the performance in electronic systems.

Sales increased to £9.6 billion, up 4% on a constant currency basis and better than the UBS estimate for a rise of 2%. The company recently signed a £3.7 billion production contract with the MoD for an initial batch of three Type 26 frigates, resulting in an order intake of £2.8 billion in the half year.

The period also saw a £1.4 billion contract for the sixth Astute Class submarine from the Royal Navy, while in April the fourth Astute boat, Audacious, was launched.

BAE expects 2017 underlying earnings per share to be 5-10% higher than 2016. This reflects a softening in cyber revenues and the impact of restructuring charges, which will be offset by progress in the rest of the business.

With BAE sticking to its previous targets and guidance, UBS thinks the latest reversal is a blip, so sticks with its price target of 665p, implying a price/earnings ratio of 14.8 times.

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