Defence giant BAE Systems (BA.) slumps 9% to 397.6p as 2013 results come in short of expectations and it guides for earnings per share (EPS) to fall between 5% and 10% year-on-year in 2014.


The company is the latest of a number of high-profile names to disappoint the market – following the poor example set by Tate & Lyle (TATE) and Rolls-Royce (RR.) last week (13 Feb). Like Rolls it lays much of the blame for a disappointing 2014 outlook on cuts in the US defence sector.


Today's announcement also wipes out the gains provided by yesterday's long-awaited news of a pricing agreement on its Salaam Eurofighter contract in Saudi Arabia.


The company reports revenues of £18.2 billion, a rise of 2% on the previous year but £700 million short of expectations. Profits after tax tumbled 82% to £176 million. Underlying earnings before interest, taxation and amortisation (EBITA) rises 3.3% to £1.93 billion and underlying EPS comes in at 42p which is up 8.5% year-on-year.


In an attempt to soothe investors' frustrations the dividend is hiked 3% to 20.1p. Other bright spots include a reduction in the pension deficit from £4.3 billion at the half-year stage to £3.5 billion and the order book is also maintained at 2012 levels at £42.7 billion. Net debt falls from £1.2 billion to £699 million.


Sash Tusa, analyst at research house Edison Investment, is not persuaded by the 'jam tomorrow' nature of the results. 'Results look a little light and we believe that the market will be unimpressed by company guidance of a 5% to 10% drop in earnings for 2014. The company’s statement that its strong order book and balance sheet (we assume cum-Salaam catch-up payment) "provide a solid basis for growth over the medium term" in our view has an element of "jam tomorrow" in it. And this confidence does not seem strongly supported by the 3% increase in the full-year dividend compared to Rolls-Royce's 13% increase.'


Investec reiterates its 'hold' rating and puts its 450p price target under review. It comments: 'We would expect the shares to be down this morning, reflecting the guidance cuts. However, looking slightly further out, the dividend remains supportive and we would expect the stock to be a beneficiary of the Vodafone cash return.'

Issue Date: 20 Feb 2014