U.K. aerospace and defense group BAE Systems looks to be preparing the ground for Charles Woodburn, an oil industry executive, to become CEO. By hiring an outsider, it's taking a leaf from Rolls-Royce's playbook. Last year the aircraft engine maker appointed a chipmaking expert, Warren East, to help it overcome falling profits.
Woodburn's not on such a dramatic rescue mission, however, since incumbent CEO Ian King has steered BAE through a tricky period of falling U.K. and U.S. defense budgets. That doesn't mean it's all going to be smooth sailing for his prospective successor.
King's already done much of the unpleasant work of cost-cutting, including downsizing BAE's workforce. Though revenues shrank by more than a quarter between 2010-2014, BAE's net income margin has remained broadly stable during that time. The company's expected to report a healthy 5.6 percent revenue growth for 2015 on Thursday, though analysts see that cooling to 2.2 percent in 2016 and 3.4 percent in 2017.
It's all a far cry from three years ago, when BAE's position was so weak that its best option looked to be a tieup with EADS, a Franco-German company now known as Airbus. That didn't happen, and King managed to revive the company's fortunes.
Nevertheless, several areas of concern remain. Saudi Arabia's fiscal woes -- a function of plunging oil revenues -- aren't encouraging given the kingdom accounts for a fifth of sales and there are hopes it will order another batch of Typhoon jets. Standard & Poor's cut to its credit rating outlook about a year ago cited concerns on its pension deficit, now at 4.8 billion pounds ($7 billion).
If he gets the nod to become CEO one day, Woodburn will need to manage those risks, while demonstrating he has the skills to cope with perennially tricky government customers (the U.K., U.S. and Saudi Arabia account for about 80 percent of sales) and take advantage of a changing environment.
U.K. and U.S. defense spending now looks to have reached a trough. An uptick in global conflict and the U.K.'s slated 31 billion-pound renewal of its Trident nuclear deterrent all bode well for BAE. And, the defense industry is a natural refuge for investors when cyclical stocks get crushed by recession fears.
Yet BAE's shares look quite cheap, trading at 12 times forward earnings compared to a peer average of 15.6 times. Its 4.4 percent dividend yield is also attractive.
BAE's so far managed to keep shareholders happy with a one billion pound buyback program. But the U.S. has warned defense companies they now need to focus less on shareholder returns and more on developing tomorrow's technology. Woodburn needs to spell out a more compelling vision for growth.
He could do worse than deploy more cash towards R&D, which received only about 9 percent of revenues in 2014. That is more than Rolls Royce and Airbus but some way behind European peers like Finmeccanica and Dassault Aviation, according to Bloomberg data.
He could also try harder to expand BAE's cyber security business, which spans both public and faster-growing commercial customers. In spite of the 531 million pound acquisition of Detica in 2008, the company is still under-represented here -- cyber and intelligence was only 7 percent of 2014 sales, compared to 24 percent for Raytheon's intelligence and information systems unit.
Can he do it? Well, unlike Rolls-Royce's East, who turned ARM Holdings into a revenue and profit generating machine, 44-year old Woodburn is a fairly unknown quantity. The long-serving Schlumberger manager is currently the CEO of U.K. oilfield exploration and testing specialist Expro International, which generated $1.3 billion in sales last year, or about 5 percent of BAE's estimated total.
If he replaces King next year, as expected, he will inherit an orderly ship. His challenge will be to make it move faster.
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