Just
two
weeks
ago,
NATO
was
celebrating
it’s
75th
anniversary.
Now,
an
assassination
attempt,
the
selection
of
arch-isolationist
JD
Vance
as
Trump’s
running
mate,
and
the
departure
of
Joe
Biden
from
the
US
presidential
race,
all
point
to
one
thing:
a
rethink
on
defence
in
Europe.
It’s
long
been
predicted
a
second
Trump
term
would
jeopardise
transatlantic
security
ties.
Trump
made
no
secret
of
his
frustration
with
NATO
partners
during
his
first
term.
The
addition
of
JD
Vance,
a
former
Marine
Corps
correspondent
who
says
he
is
sick
of
US
politicians
bankrolling
european
security,
somewhat
ups
the
ante.
Investors
with
one
eye
on
this
unfolding
narrative
would
now
be
wise
to
keep
their
eye
on
the
companies
that
supply
NATO
with
their
weapons,
ammunition,
and
modern
materiel.
For
Loredana
Muharremi,
Morningstar
equity
research
analyst
on
Aerospace
&
Defence, the
possible
re-election
of
Trump
means
European
countries
may
have
to
dig
deeper
for
their
their
contributions
to
Ukraine’s
war
effort,
in
addition
to
ensuring
NATO
members
meet
their
2%
GDP
requirements
on
defence
spending.
“Given
the
increased
support
needed
for
Ukraine
if
there
is
a
pullout
of
US
support,
we
expect
that
the
collaboration
with
the
UK
will
not
only
be
positive
for
immediate
procurement,
but
also
for
long
term
development
programmes,”
she
says.
But
although
Trump
has
made
no
secret
of
his
frustration
with
the
US’
outsized
NATO
contribution,
he
has
not
fully
closed
the
door
to
US
giving
military
support
to
Ukraine.
“[Trump]
has
indicated
an
openness
to
continuing
financial
assistance
if
it
was
structured
as
loans
and
not
grants.
And
he
has
made
calls
for
European
countries
to
match
US
contributions,”
she
adds.
Either
way,
the
overall
picture
is
one
of
increased
collaboration –
particularly
between
the
UK
and
the
European
Union.
BAE
Systems
Shares:
Bad
Month,
Good
Prospects
The
company
whose
shares
stands
to
benefit
most
consistently
from
this
situation
is
Wide-Moat
BAE
Systems
(BA.),
Muharemmi
says.
Over
the
last
month,
the
FTSE
100
company’s
stock
is
down
6%,
but
its
shares
could
now
rally
once
more
on
higher
orders
for
its
fighter
jets,
naval
vessels,
armoured
vehicles,
and
communications
technology.
“It
has
already
established
a
local
direct
presence
in
Ukraine
including
providing
repair
and
maintenance
services
for
artillery
systems
and
other
military
equipment
donated
by
the
UK
and
other
NATO
allies,
which
position
it
strategically
in
case
of
a
ramp
up
in
military
aids,”
Muharremi
says.
“But
the
most
important
point is
the
possibility
of
multi-year
contracts
and
joint
development
projects
with
European
countries
aimed
at
enhancing
European
military
readiness
and
self-reliance.”
Key
Morningstar
Metrics
For
BAE
Systems
• Morningstar
Fair
Value
Estimate: £14.90
• Morningstar
Star
Rating: ★★★★
• Morningstar
Economic
Moat
Rating:
Wide
• Morningstar
Uncertainty
Rating:
Medium
Which
Funds
Are
Backing
BAE
Systems?
Guy
Anderson,
managing
director
and
portfolio
manager
of
the
Morningstar
Bronze-Rated
JP
Morgan
UK
Equity
Growth
fund,
says
BAE
is
already
benefiting
from
heightened
tensions.
“BAE
has
clearly
had
a
very
good
order
intake.
They
have
had
a
very
strong
book
to
bill,
and
their
revenue
has
been
growing,”
he
says.
“Alongside
revenue
they
have
had
good
operating
margins
and
good
cash
conversion.
They
have
also
been
returning
some
of
that
cash
to
shareholders
by
putting
in
place
a
share
buyback
plan.”
In
February,
BAE
Systems,
which
makes
up
3.16%
of
Anderson’s
fund,
announced
that
its
pre-tax
profits
had
climbed
17%
to
£2.33
billion
in
2023
from
£1.99
billion
in
2022.
Its
revenue
grew 8.6%
to
£23.08
billion
from
£21.26
billion,
and
its
order
book
rose
by 19%
to
£58.0
billion
from
£48.9
billion,
in
part
driven
by production
and
maintenance
supply
of
US-purchased
M777s
howitzers
(pictured
above),
which
have
been
deployed
extensively
in
Ukraine
and
have
received
increased
interest
from
global
armies.
The
strong
results
led
the
company
to
increase
its
dividend
payments.
“We
are
in
a
position
where
NATO
defence
spending
is
going
to
increase
over
the
coming
years,
and
even
if
you
think
about
BAE,
short
cycle
work
is
only
about
10%
of
their
group
revenue,”
Anderson
says.
“NATO
spend
takes
multiple
years
to
work
through
the
system
and
come
into
revenue.
So,
when
[BAE
Systems]
looks
at
what
their
outlook
is
for
the
next
five
or
10
years,
they
see
this
strong
uplift
in
order
momentum.”
BAE
will
now
report
its
Q2
earnings
for
2024
on
1
August.
QinetiQ
Shares
and
The
Smart
Warfare
Win
Other
fund
managers
are
also
backing
UK-listed
defence
companies.
But
if
there
is
one
thing
the
Ukraine
conflict
has
taught
them,
it
is
that
budget
pressures
are
boosting
cyber.
David
Stevenson,
fund
manager
of
the
Morningstar
Silver-Rated
WS
Amati
UK
Listed
Smaller
Companies
fund,
has
been
a
long-term
holder
of
FTSE
250
defence
company
QinetiQ,
which
has
offices
in
Bristol,
Farnborough,
and
London.
The
defence
stock,
which
is
the
fund’s
top
holding
at
4.25%
of
the
portfolio,
is
making
waves
as
technology
becomes
increasingly
integrated
in
warfare.
“Weapons
and
equipment
platforms
are
almost
becoming
unaffordable,”
Stevenson
says.
“That’s
why
we
see
it
as
a
consolidating
sector.
Defence
firms
are
either
collaborating,
merging,
or
being
taken
over.
Government
budgets
are
struggling
with
what
they
have
to
spend
on
weapons,
vehicles,
ships
and
tanks.
“That’s
led
to
a
switch
to
cleverer
warfare –
essentially
electronic
warfare.
That
is
why
we
are
focused
on
QinetiQ.
QinetiQ
focuses
on
test
and
evaluation
in
cyber,
on
autonomous
warfare,
on
laser
systems.
All
of
these
areas
are
where
we
think
budgets
will
shift
to.”
The
business,
which
was
originally
spun
out
of
the
UK’s
own
Ministry
of
Defence,
is
a
holding
that
Anderson
also
backs.
He
says
its
strong
order
intake
over
the
past
three
years
has
led
to
double-digit
revenue
growth
per
annum
over
that
same
period.
He
also
points
to
the
company’s
globally-diversified
operations
bases:
in
the
UK,
North
America,
and
Australia,
which
the
business
calls
its
three
“home
markets”.
On
that
note,
QinetiQ
is
set
to
benefit
from
the
AUKUS
agreement,
which
saw
the
UK,
the
US
and
Australia
join
forces
in
a
trilateral
Indo-Pacific
security
agreement
based
on
the
provision
of
nuclear
submarines.
Vishal
Bhatia,
senior
fund
manager
of
the Bronze-Rated
JOHCM
UK
Growth fund
is
also
bullish
about
the
company.
“The
backdrop
is
a
meaningful
positive
for
QinetiQ,
which
has
the
skills
and
experience
in
the
next
generation
technology
areas
that
can
hopefully
make
the
world
a
slightly
safer
placem,”
he
says.
“The
company
demonstrated
its
strong
strategic
positioning
by
unveiling
a
better
than
expected
outlook
earlier
in
the
year,
and
a
substantial
pipeline
for
its
high
technology
service
suite.
The
management
has
optimised
its
capital
allocation
policy,
which
in
turn
is
creating
greater
optionality
for
investment
in
growth
and
further
shareholder
returns.”
QinetiQ
Group
recently
said
its
first
quarter
had
been
positive,
with
revenue
under
contract
increasing
to
73%
from
64%.
The
firm’s
chief
executive
Steve
Wadey
also
said
the
business
expects
high
single-digit
organic
revenue
growth,
while
announcing
£32
million
of
a
£100
million
share
buyback
programme
will
be
complete
by
the
end
of
the
first
quarter.
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