BAE share price down, profit falls amid lower defense spending

BAE System Plc announced on Thursday a 12% decline in full-year profit as Europe’s biggest defense company suffered amid lower military spending.

The London-based company said underlying earnings before interest, taxes, and amortization dropped to £1.70 billion in 2014 compared to the £1.93 billion stated in the prior period.

Revenue for the year slided 8.5% to £16.63 billion, but the company said results were in line with its guidance. Additionally, sales in 2013 were lifted by a contract settlement with Saudi Arabia for 72 Typhoon aircraft.

BAE said sales were hit by the expected decrease in volumes in its Land & Armaments business and by unfavorable exchange rates, which translated in £600 million less in revenue.

The weapon maker, which counts on North America to generate around 30% of its sales, said revenue from its US platforms and services business declined 16.5% to £3.3 billion, while underlying EBITA dropped 35% to £147 million.

The company has been suffering as the US has reduced their defense spending for eight years in a row. However, the company is banking on the proposed substantial increase in military spending to rejuvenate its profit growth.

Earlier this month President Barack Obama submitted a financial plan for 2016 that includes higher funding for military purposes. Defense spending could be boosted in other parts of the world as well as geopolitical tensions in the Middle East and eastern Europe rage on.

BAE reported net income of £740 million for the past year compared to £168 billion in 2013, when results were dented by £887 million in impairment charges.

Full-year dividend would be 20.5 pence a share versus 20.1 pence in the prior period.

For the year ahead BAE projected underlying earnings to be “marginally higher” compared to 2014 as the company expects robust naval and aircraft orders.

“Looking ahead, defense spending remains a high priority in a number of international markets. We believe US budgets are now relatively stable, with some early indications of a modest improvement in 2016,” said Chief Executive Ian King.

BAE gained 0.29% on Wednesday and closed at GBX 522.00 in London. On Thursday the stock fell 0.48% to GBX 519.50 at 09:24 GMT, marking a one-year increase of 18.59%. The company is valued at £16.46 billion.

According to the Financial Times, the 20 analysts offering 12-month price targets for BAE Systems have a median target of GBX 508.50, with a high estimate of GBX 585.00 and a low estimate of GBX 370.00. The median estimate represents a 2.59% decrease from the last closing price.