British defense company BAE Systems PLC (LON:BA), one of the world’s largest, may be unique within the global defense industry as a company well prepared for reduced U.S. military spending, wrote UBS AG (VTX:UBSN) analysts on Wednesday.
“BAE Systems is unique in our defense coverage in that it has a large enough growth market in the Middle East (mainly Saudi Arabia) to offset the decline in the U.S. defense,” wrote defense analyst Charles Armitage in a research note.
Congressional stalemates over deficits and budget sequester cuts mean that the eventual U.S. defense budget this year remains uncertain. The Pentagon accounts for about 40 percent of global military spending, according to the note.
“European defense budgets look broadly flat, and as a result global defense suppliers are looking to the Middle East and Asia to maintain sales,” read the note, in an industry outlook section. The UBS analysts have also devalued all defense company stocks with an exposure to U.S. government purchases by 10 percent.
“With falling global demand and increasing competition, the outlook is tough,” wrote the analysts.
Major defense rivals in the sector include General Dynamics Corporation (NYSE:GD), Lockheed Martin Corporation (NYSE:LMT) and Raytheon Company (NYSE:RTN). British firms include Cobham plc (LON:COB), which makes military aircraft and electronic warfare antennas.
BAE’s advantage stems mostly from its Saudi market, where it sells Typhoon combat jets to the government. The company’s latest financial filings show that it earned operating profits of 750 million pounds ($1.17 billion) in the last six months, though that’s down 2 pence in earnings per share from 2011.
BAE also recently submitted a bid to the United Arab Emirates, offering to sell up to 60 Typhoon aircraft. A successful bid could boost its earnings per share by 30 pence.
Even with all these positive signs, though, earnings before tax and other factors are expected to stay flat at BAE, at 2 billion pounds, from 2012 to 2016, before earnings growth picks back up. That’s an indication of the health of the global defense industry.
Another company with a growing defense business is Brazil’s Embraer SA’s (BVMF:EMBR3), which is supplying more defense aircraft to smaller emerging market militaries, wrote William Blair & Co. industrial analyst Nick Heymann in an industry update last week.
The U.S. Department of Defense requested $167 billion to spend on major weapons systems alone this year, according to April 2013 budget documents.