BAE Systems PLC (LON:BAE) acquisition of a US military GPS business and airborne radios unit suggests that defence firm is looking to address “the main drivers of the long-standing valuation discount” to its American prime peers, according to analysts at Barclays.
In a note on Tuesday upgrading the FTSE 100 group to ‘overweight’ from ‘equal weight’ and increasing its target price to 760p from 550p, the bank said the US$2.2bn acquisition bundle from US defence giants Raytheon Co (NYSE:RTN) and United Technologies Corp (NYSE:UTX) will increase BAE’s revenue exposure to the Department of Defense and other attractive growth markets.
Analysts also said that with the company’s cash generation improving, repayments under its pension scheme will achieve full funding, leaving “greater optionality” for where the company spends the rest of its money.
The bank added that the predictability of BAE’s free cash flow had improved thanks to a shift from large export order down-payment cash swings and toward higher profitability and cash generation through its Electronic Systems arm, a move that they said will be “propelled” by the recent US acquisition.
“We see…organic revenue growth & earnings growth as in line with US defence primes, which should deliver an increasingly attractive cash profile and higher returns”, Barclays said.
Shares in BAE were 0.3% lower at 633p in mid-morning trading on Tuesday.