BAE Systems shares nosedive after the Pentagon cuts back

epa04058905 A handout picture provided by BAE Systems on 06 February 2014 shows the Taranis unmanned combat aircraft in flight at an undisclosed location, 16 August 2013. Media reports state, that the British-built Taranis combat drone has successfully completed first test flights. A video apparently dated August 2013 and released on 06 February 2014 shows the aircraft during test flights. According to BAE, Taranis is capable of 'undertaking sustained surveillance, marking targets, gathering intelligence, deterring adversaries and carrying out strikes in hostile territory.' EPA/CHRIS RYDING / BAE SYSTEMS / HANDOUT HANDOUT EDITORIAL USE ONLY/NO SALES

Mark Leftly

20 February 2014

Investors in BAE Systems ran for cover today after the defence giant took an £865 million hit in the US, where an axe has been taken to the Pentagon’s bloated budget.

The shares slumped more than 9% as the Eurofighter Typhoon maker revealed profits fell 81.6% to £176 million in 2013 and warned earnings per share this year will drop by between 5% and 10%.

Some of the £865 million writedowns, which made up a total impairment charge of £887 million, are related to acquisitions BAE made in the US several years ago, but the group conceded pressures to cut spending and reduce the deficit on the other side of the pond are set to continue.

BAE’s poor results are a significant blow for UK manufacturing, illustrated by its huge revenue of nearly £18.2 billion last year, which was up slightly from £17.9 billion in 2012.

In response, the shares dived 40p, or 9.2%, to 396.8p. Chief executive Ian King said the defence cuts in the US were “impacting the whole industry”.

However, he insisted that the group had “delivered a solid performance in 2013, against the background of reduced government spending and challenging market conditions”.

In one piece of good news for investors, finance director Peter Lynas said BAE would be accelerating its share buyback programme; in the first of a three-year plan, around £270 million of shares have been repurchased. “We’ll be upping the pace,” said Lynas, who added that the writedowns had no impact on dividend payouts and were a “technical accounting issue”.

King said yesterday’s welcome announcement that tortuous negotiations over the price of the sale of 72 Eurofighter jets to Saudi Arabia have been agreed puts BAE in a strong position to win more work with the kingdom. He described its need for more kit as “very real and immediate”.

Garry White, chief investment commentator at Charles Stanley, said investors who piled into BAE shares after yesterday’s Saudi Arabia announcement must be “smarting” today.

King also gave a hint at the company’s concerns over the implications of a “yes” vote for Scottish independence, though again declined to give a clear answer over whether a company with shipbuilding operations north of the border has discussed contingency plans with the Ministry of Defence.