BAE Systems has announced that it will be cutting over 2000 UK jobs, partly due to slowdown in orders for the Typhoon jet.

It is hard to imagine that a company of BAE’s size and scale could be damaged by orders for a single unit like the Typhoon, but this seems to have had a dramatic impact.

For investors, the question is whether to continue to hold BAE Systems shares?

According to Hargreaves Lansdown, recent trading has been in line with management expectations, and the overall outlook remains unchanged. The share price was little impacted by the news of the redundancies.

The reductions are coming from BAE’s Platforms and Services division, which was responsible for building the Typhoon fighter and Hawk trainer. This will now be rolled into a new air and maritime unit.

All is not doom and gloom for BAE: don’t forget that it is currently working on the big new aircraft carrier program for the UK navy, which includes the HMS Queen Elizabeth. That vessel commenced sea trials in June. In addition, the UK government has also recently placed an order to a batch of three Type 26 frigates.

The company’s US Platforms & Services division has seen operating profit rise 25% to £99 million. Work includes building new armoured vehicles for the US military, a contract valued at over £900 million. These are very substantial amounts of business, and it is important for investors to remember that BAE does work all over the world.

Hargreaves Lansdown says that underlying earnings per share for BAE Systems is anticipated to be 5-10% higher than 2016’s 40.3 pence. Net debt currently stands at £1.7 billion.

Overall sentiment on BAE Systems has come off a little – most analysts see it as an outperform or a hold, but there are not as many buyers now. However nobody is recommending a sell.

“Potentially in a corrective phase since record highs in mid-June, BAE Systems shares remain in a 2011 uptrend/rising channel with support around 560p,” says Michael van Dulken, Head of Research at Accendo Markets. “The company delivered a confident update in its latest trading statement with guidance confirmed and more orders for both aircraft and military equipment. However, recent read-across from US cost-cutting on the F-35 project and BAE announcing double the expected 1,000 job losses suggests a perhaps not-so-rosy outlook for defence sector spending and thus capacity requirements.”

In August BAE reported semi-annual earnings of 0.197 per share, which was in line with analysts’ consensus, and exceeded the results for the same period by over 13%. At the time of writing, the stock was up approximately 12.33% over a year ago.

Sir Roger Carr, chairman of the company’s board, was the last director to load up significantly on BAE shares. He bought £200,000 of BAE stock on August 3, the day after its last results. Charles Woodburn, the CEO of BAE, buys stock regularly on the 14th of the month, but these are nominal amounts.

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10th October 2017
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