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How BAE Systems PLC (ADR) (BAESY) Measures up as a GARP Investment

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LONDON — A popular way to dig out reasonably priced stocks with robust growth potential is through the “Growth at a Reasonable Price”, or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share’s price weighs up in relation to its near-term growth prospects — a reading below 1 is generally considered decent value for money.

Today I am looking at BAE Systems PLC (ADR) (OTCBB:BAESY) to see how it measures up.


What are BAE Systems’ earnings expected to do?

2013 2014
EPS Growth 9.0% (1.0)%
P/E Ratio 9.7 9.8
PEG Ratio 1 n/a

Source: Digital Look

BAE Systems PLC (ADR) (OTCBB:BAESY) is widely expected to punch solid earnings growth in the coming year, although fears of falling defense expenditure in the West is predicted to result in a slight drop in 2014.

For this year, BAE Systems PLC (ADR) (OTCBB:BAESY) looks like great value with a PEG reading bang on the money at one, while a P/E ratio of below 10 — territory which is generally considered decent value — also underlines its position as a cheap pick. Next year’s earnings dip knocks out this PEG ratio, however, although its P/E multiple is projected to remain in bargain terrain.

Does BAE Systems provide decent value against its rivals?

FTSE 100 Aerospace & Defense
Prospective P/E Ratio 16.7 12.9
Prospective PEG Ratio 4.7 3.5

Source: Digital Look

BAE Systems PLC (ADR) (OTCBB:BAESY) stacks up favorably against both the FTSE 100 as well as its peers in the aerospace and defense sector, considering both forward PEG and P/E ratios.

Many of BAE Systems’ defense rivals are smaller, more flexible and thus better equipped to protect earnings despite falling expenditure on both sides of the Atlantic. Still, these problems are still a heavy plague across the whole sector, making BAE Systems PLC (ADR) (OTCBB:BAESY) look cheap at current prices.

Although fears over reduced spending from traditional customers in the near term continues to dent investor appeal, the company’s huge order pipeline — its backlog rose 8% last year to £42.4 billion — illustrates BAE Systems’ solid growth potential.

An important defense player with expanding horizons
BAE Systems PLC (ADR) (OTCBB:BAESY) is extending its geographical range in order to mitigate the effect of falling orders from the West, and saw orders outside of the U.S. and U.K. advance to £11.2 billion in 2012, a gargantuan 133% leap from the previous year. The company is already a major player in Saudi Arabia, and is making huge inroads into other lucrative developing markets including India.

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