BUY OR SELL-Is BAE Systems a good buy as defence cuts loom?

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* Impact of defence cuts worries some analysts

* Others say emerging mkt, services growth to offset cuts

By Rhys Jones

LONDON, Aug 27 (BestGrowthStock) – BAE Systems Plc’s (BAES.L: ) growth
in emerging markets and its shift towards defence services could
offset the expected impact of cuts to the UK defence budget,
leading to more profit upgrades by analysts.

BAE shares have fallen 10 percent to a five-year low in the
last six months on fears cuts in UK and U.S. defence programmes
will hit sales. This compares with a flat performance by the
FTSE All Share Aerospace & Defence Index (.FTASX2710: ).

Britain is conducting a spending review expected to usher in
a cut in the defence budget of up to 20 percent, part of its
plans to reduce a spiralling budget deficit. Defence budgets are
also flat or declining in the United States and across much of
Europe.

BAE, however, is confident growing defence services sales,
cost controls and demand from emerging markets will fuel growth.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic showing performance of BAE shares compared with the sector and the FTSE All Share index: http://graphics.thomsonreuters.com/gfx1/SBrb_20102608095112.jpg ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

BUY

Many analysts believe concerns over the impact of UK defence
spending cuts on BAE are overdone, given the UK now accounts for
a fifth of its annual sales, compared with 54 percent in the
United States.

“BAE could actually benefit from future changes in the
market … the media focus has been on cutting costs, with
little comment on sustaining capability or reducing costs by
increased outsourcing to industry,” said J.P. Morgan Cazenove
analyst John Middleton, who holds an “overweight” rating on BAE
and upped its annual profit target earlier this month.

Analysts also believe BAE could double its revenue from
Saudi Arabia by 2011 (to around 3.5 billion pounds per year) as
the Kingdom’s air force continues its rapid expansion.

“BAE’s Saudi business is a key differentiator between it and
other global defence companies,” said Nomura analyst, Jason
Adams, who has a “buy” rating on the stock and recently raised
BAE’s full-year profit target.

Its newest “home market” India also looks promising, while
key roles on the largest combat aircraft programmes — the F-35
and Eurofighter jets — should also stand it in good stead.

“The company expects growth for 2010 and pressure on defence
budgets is being addressed by cost reductions,” said Societe
Generale analyst Zafar Khan, the top rated analyst covering the
company on Thomson Reuters Starmine.

“We maintain a ‘buy’ because we believe BAE represents the
best investment vehicle in the defence sector.”

SELL

Credit Agricole analyst Thomas Mesmin, who rates BAE
“underperform”, said he was “particularly cautious on the UK
defence budget, which could be cut by 15 percent over three
years.”

UK projects which analysts say could go are the Tornado and
Nimrod jets, both of which have heavy BAE involvement.

Mesmin also believes some of BAE’s programmes in the United
States — where its export licences have yet to be approved —
are at risk from plans to cut $100 billion of defence spend over
five years.

“Concerns over the outlook for defence spending are likely
to continue as long as the outlook for government deficits
remains as weak as it does,” said UBS analyst Avi Hoddes, who
recently downgraded BAE to “neutral” from “buy”.

Slowing sales at BAE’s land systems unit are also a concern
after the recent loss of two large contracts to U.S. firms.

Earlier this year General Dynamics (GD.N: ) won a $6 billion
contract to build a new UK army tank, while a $3 billion deal to
build trucks for the U.S. Army went to Oshkosh (OSK.N: ).
(Editing by David Cowell)

BUY OR SELL-Is BAE Systems a good buy as defence cuts loom?