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BAE May Post Profit as Writedowns, Fines Are Behind It

BAE Systems Plc, Europe’s largest defense company, may say it returned to profit in 2010 after fines and writedowns contributed to a loss the previous year.

Net income was probably 1.13 billion pounds ($1.82 billion), based on the average of six analyst estimates in a Bloomberg survey. BAE posted a 2009 net loss of 67 million pounds following 973 million pounds in charges, mostly on the value of its Armor Holdings unit, and $450 million in fines after probes into dealings in countries including South Africa.

Sales at areas including the programs and support division may be offsetting lower revenue at the land and armaments business, said Sandy Morris, a Royal Bank of Scotland analyst in London. Last July BAE and a partner won a 500 million-pound order from India for 57 Hawk jet trainers, and it received a contract worth as much as $365 million for repair and overhaul work on 11 U.S. destroyers.

“It’s a steady year with some ebbs and flows. A lot of restructuring, for example,” Morris, who has a “buy” recommendation on the stock, said by phone. “Land and armaments is clearly winding down, and it’s a question of how much they can protect the profits.”

BAE rose as much as 5.4 pence, or 1.5 percent, to 356.2 pence in London and traded at 355.6 pence at 12:23 p.m., valuing the company at 12.1 billion pounds. The stock has risen 7.8 percent so far this year.

Land Slide

Morris estimates full-year revenue for the Arlington, Virginia-based land and armaments business, which makes naval guns, armed vehicles and missile launching systems, fell to $9.38 billion from $10.55 billion. Overall, BAE’s sales were little changed at 22.2 billion pounds, according to the survey.

“When can we be fairly confident the slide has halted in land and armaments? Because then we might see the growth coming through from the other divisions,” Edward Stacey, an analyst at Espirito Santo Investment Bank in London with a “buy” recommendation on the stock, said by phone.

London-based BAE said on Dec. 9 it would cut 1,300 jobs after the government terminated the Harrier and Nimrod aircraft programs as it slashed defense spending. Prime Minister David Cameron said Oct. 19 that the country’s armed forces will be cut by 17,000 and that 25,000 civilian jobs will be eliminated at the Ministry of Defence. Military expenditure will be reduced by 8 percent, adjusted for inflation, over four years.

The ministry may make further cuts of at least 1 billion pounds a year on top of those identified in October’s Strategic Defence and Security Review, the Financial Times reported on Jan. 20, citing unidentified senior officials at the department.

“The headlines about the SDSR being reopened seem to have worried the market a bit, but we don’t expect any big impact,” Stacey said.

A year ago BAE forecast growth in 2010 for its four operating groups except for land and armaments, where it said “return on sales will improve as rationalization and efficiency programs progress.” In its first-half results it said it expected growth for the company as whole for the full year.

“It’s not a year in which the numbers are going to excite,” Morris said. “We’re just looking for a nice solid year.”

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