Tuesday, 14 July 2015

Portfolio buy #1

That sounds posh doesn’t it? Here we go then, warts and all decision making process for share buying – firstly, let’s get it out of the way, as you will soon see I am not a financial advisor, stock broker or anyone who has any qualifications to provide investment advice. My investment decisions are mine, as are my mistakes. This is not an endorsement to act and it’s most likely to provide entertainment value for people who actually know what they’re doing.

This time it’s BAE Systems where I’ve increased an existing relatively small holding.

My method of buying shares is to try and buy market dips and therefore a jacked up yield. Hopefully the dips represent general, mild panic sell-offs rather than company specific issues – I don’t pretend that I’m going to be able to tell whether a company is a turnaround or not. I aim to invest where the yield is better than the FTSE100.

BAE Systems –

  • Weapons maker (ethically dubious perhaps but I’m okay with that),
  • Main customers are large Government contracts to provide air, sea, land and cyber systems.
  • They operate across the globe
  • They provide military and civilian platforms

Financial performance –

  • I do a quick initial analysis to show yield, EPS, divi cover and a Gordon’s Growth Model to see roughly how it’s priced. I also have Benjamin Graham’s tweaked equation to value shares for a cross reference. If more than about one or two of these aren’t looking good then I’ll stop there, or get quickly dissuaded from doing much more analysis such as cash flow, returns on capital, profit margins etc.
  • Revenues and profits have dipped as austerity took hold, but have not dropped away to a large degree.
  • Dividend has been increased consistently, though slowly.
  • PE is low-ish at about 12 and below a longer running measure at 13.5.
  • EPS seems relatively stable over recent years given the issues facing them
Future prospects –
  • Positive on the whole, coming from internal factor’s (UK has just promised to maintain defence spending at 2% of GPD and increase the MoD budget by 0.5% in real terms each year), Russia’s machinations in the east might see a more spending in this area from the UK and overseas.
  • Moving more into cyber which will be an increasing source of revenue, and linked to work better with existing platforms, so hopefully better eco-system.
  • Existing orders remain consistent with previous years with new orders rolling through on what appears to be a nice trend.
  • General stuff in the accounts saying how they’re looking to manage in a cost effective way etc.
So it’s pretty solid. The dividend is covered and the company seems to be managed well. The company is one of the biggest in its field with few major competitors. The model is simple, the products are complicated – ie decent moat.

The main risks would be another financial crisis, which would see Governments pull back or “pause” projects, but big ticket items like Trident are stimulus in their own right and are likely to still get built backing up the defensive quality. 

Another crisis would risk the dividend and accelerate the degradation of shareholder equity. Hopefully the repair of Government balance sheets will allow BAE’s to improve too. If borrowing starts kicking up and revenues remain depressed then I would review.

So in conclusion:         

  • Purchase price of £4.71 per share, post commissions and stamp etc.
  • Equating to a 4.4% yield
  • A share price 15% off the 52 week high with no material company specific news
  • Decent future income streams
  • Well positioned company in it’s market.

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