Analyst Report on Bae Systems Thesis

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BAE Systems Financial Analysis

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As one of the global leaders in the research and development, customization, launch and support for aerospace and defense systems including armament and advanced defense electronics and intelligence technologies, BAE Systems is recognized globally for thought leadership in several key markets. The company is one of the world leaders in the manufacturing and support of avionics communications, military armament and vehicles, military manned and unmanned aircraft, combat vehicles, militarized ships, submarines, radar, electronics and guided weapon systems. The company employs approximately 106,000 people globally and is headquartered in London, UK. For the latest financial year ended December 2008 (FY2008) the company recorded revenues of £30.9B during the financial year. This represented an increase of 16.5% compared to 2007 and was responsible for the company achieving EBITA Margin (%) of a 19.58% in the latest fiscal period. During this latest full fiscal period BAE Systems also attained the highest EBITA Margin (%) in the last ten years of operations. Operating profits for the company earned during Fiscal Year 2008 were £1.7B which represented an increase of 46% over 2007. Net Profit eared increased a remarkable of 93.7% over 2007, attaining £1.7B ($3,237.3 million) in 2008. For a comparative ratio analysis over three years between BAE Systems and EADS, General Dynamics, Lockheed Martin, and Northrop Grumman see Appendix A. For a 10-year analysis of 19 financial ratios of these companies see Appendix B. Please see Appendix C for Liquidity, Profitability, Stability and Investor Ratios.

Assessing the Competitive Strength of BAE Systems

Thesis on Analyst Report on Bae Systems Assignment

BAE Systems has been able to remain resilient in the face of a challenging economic climate due to a several strengths which also serve to differentiate the company from global competitors. First, the diversified nature of the BAE Systems business model has been the catalyst of distributed revenue production across geographic and business sectors. The combined contributions of defense spending including new fighter aircraft launched this year (FT.com, 2009) and the reliance on services businesses that are managed to Six Sigma quality standards (Jazayeri, Scapens, 2008) have both contributed to the company's exceptional financial performance in the midst of a recession. BAE Systems generates 56.4% of its total revenues from the U.S., with 17.4% from the UK, followed by 9.2% from Saudi Arabia and Europe responsible for 9.8%. The Asia/pacific region generate 4.2% and the rest of the word, 2.9%. There continues to be significant increases in global defense spending, which is in turn leading to growth in the global aerospace and defense market. BAE Systems is also one of the few foreign contractors who have attained the level of security clearance necessary with the U.S. Government and U.S. Department of Defense to bid on classified projects and contracts. This has led to significant design wins in the embedded systems division of BAE Systems in addition to a recurring license and support revenue stream from the U.S. Department of Defense and branches of service. Globally BAE Systems predicts the A&D market will generate total revenues of £1.3B in 2007 and experience a 4% Compound Annual Growth Rate (CAGR) through 2012. This is fueled by American funding of £8B for 2008 in the U.S. Department of Defense total operating budget and the continual development of new ordinance and defense systems for the conflicts in Afghanistan and Iraq. In total BAE Systems projects that the defense segment of the global market will be worth £8B by 2012 representing just over 75% of the markets' overall value. BAE Systems' core business is in this segment and competes directly with EADS, General Dynamics, Lockheed Martin, and Northrop Grumman in this largest global market.

Determinants of Performance Strength

BAE Systems' core strengths are in its distributed product and services strategies and the intensive investments in continued process improvement including Six Sigma and balanced scorecard approaches to management (Jazayeri, Scapens, 2008). These process efficiencies continue to be the catalyst of the company's lean manufacturing and Six Sigma-based production and services initiatives (Botta, Bahill, 2007). All of these systems and processes have also been used in the development of the company's Enterprise Compliance and Quality Management (ECQM) initiatives as well (Addey, 2001). Why BAE Systems continues to outperform the market on many key financial criteria in the short-run and stays competitive over the long-run is due to this focus on quality management and compliance to the MIL-STD specifications and environmental requirements from the U.S. And European Union. BAE Systems has in effect, by combining lean manufacturing principles with compliance initiatives, transformed compliance into a competitive advantage. The stringent requirements of manufacturing to MIL-STD specifications for example continues to give the company an exceptional level of internal process discipline (Card, Domzalski, Davies, 2008) including the ability more effectively prioritize projects and execute on more accelerated project schedules compared to its competitors (Botta, Bahill, 2007). All of these factors together are reflected in their financial performance relative to competitors, shown in Appendix A and Appendix B of this document.

When the latest series of financial ratio analyses are considered as shown in Appendix A, it is clear BAE Systems is setting the pace in profitability and asset utilization relative to the four competitors included in the analysis. BAE Systems in the latest fiscal year ended was able to attain Earnings before Tax Margin (%) of 20.73%, which is 80% over the closest competitor on this financial metric, General Dynamics at 12.3%. The industry average for this metric in the latest full fiscal year is 10.57%, further illustrating how efficient the processes and cost controls are within BAE Systems today. Second, BAE Systems in the latest full fiscal period dominates Inventory Turns of the competitors included in the analysis. At 29.78 inventory turns, BAE Systems has reached an entirely different level of efficiency -- this is one inventory turn every two weeks of the year for a corporation with annual global revenues of £32B in the latest fiscal year performance levels. Lockheed Martin is the closest competitor at 23.54 Inventory turns and the industry average for the latest full fiscal year is 21.10.

2007-2009 Comparative Analysis

Quick Ratio

Current Ratio

Earnings Before Tax Margin %

EBITDA Margin %

Gross Margin %

Inventory Turnover

Year: 2009

Peer Avg: 0.73

Peer Avg: 1.15

Peer Avg: 10.57

Peer Avg: 14.04

Peer Avg: 16.35

Peer Avg: 21.10

BAE Systems Plc

0.84

1.09

20.73

28.54

29.78

EADS N.V. (France)

0.48

1.53

23.78

3.15

General Dynamics Corp.

0.91

1.15

12.3

14.55

12.47

16.01

Lockheed Martin Corp.

0.71

1.01

10.33

11.61

10.88

23.54

Northrop Grumman Corp

0.73

0.97

-1.09

1.47

18.26

33

Quick Ratio

Current Ratio

Earnings Before Tax Margin %

EBITDA Margin %

Gross Margin %

Inventory Turnover

Year: 2008

Peer Avg: 0.73

Peer Avg: 1.15

Peer Avg: 10.57

Peer Avg: 14.04

Peer Avg: 16.35

Peer Avg: 21.10

BAE Systems Plc

0.84

1.09

20.73

28.54

29.78

EADS N.V. (France)

0.48

1.53

23.78

3.15

General Dynamics Corp.

0.91

1.15

12.3

14.55

12.47

16.01

Lockheed Martin Corp.

0.71

1.01

10.33

11.61

10.88

23.54

Northrop Grumman Corp

0.73

0.97

-1.09

1.47

18.26

33

Quick Ratio

Current Ratio

Earnings Before Tax Margin %

EBITDA Margin %

Gross Margin %

Inventory Turnover

Year: 2007

Peer Avg: 0.87

Peer Avg: 1.33

Peer Avg: 11.70

Peer Avg: 16.15

Peer Avg: 14.30

Peer Avg: 25.34

BAE Systems Plc

1.21

1.49

17.29

29.21

52.31

EADS N.V. (France)

0.53

1.66

16.25

3.22

General Dynamics Corp.

1.1

1.34

11.19

13.53

11.43

17.55

Lockheed Martin Corp.

0.77

1.11

9.95

10.69

10.11

24.81

Northrop Grumman Corp

0.74

1.05

8.39

11.16

19.41

28.81

As a result of the companies' exceptionally high level of efficiency in managing manufacturing and attaining high utilization of their assets, BAE Systems also leads the industry in Return on Assets (ROA) and Return on Equity (ROE) performance in the latest fiscal period. For the fiscal year ended 2008 BAE Systems had attained an 11.05% ROA relative to the industry average of 5.87, nearly double the peer level amount. BEA Systems was also able to surpass all competitors on this metric including Lockheed martin which posted a 10.29% ROA for the same period. On Return on Equity (ROE) % the company was able to attain 38.16%, against an industry average of 24.16%. Lockheed Martin leads the industry on this metric for the latest fiscal year with a value of 50.64%.

In FY 2008 BAE Systems dominated the ratios of Earnings before Tax Margin (%), EBITA Margin (%), Inventory Turnover, Net Profit Margin, ROA and ROI, and these figures can also be seen in Appendix A.

2007-2009 Comparative Analysis

ROA % (Net)

ROE % (Net)

ROI % (Operating)

Revenue per Employee

Year: 2009

Peer Avg: 5.87

Peer Avg: 24.16

Peer Avg: 22.73

Peer Avg: 293957.33

BAE Systems Plc

11.04

38.16

20.1

EADS N.V. (France)

2.89

18.04

19.67

General Dynamics Corp.

9.06

22.48

25.44

$316,576

Lockheed Martin Corp.

10.29

50.64

49.01

$291,878

Northrop Grumman Corp

-3.96

-8.5

-0.59

$273,418

All of these metrics of financial performance illustrate how effectively BAE has effectively re-engineered critical financial and business processes over the last three years. It is prescient… [END OF PREVIEW] . . . READ MORE

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