almost 3 years ago • 3 mins
Welcome to the penultimate piece in a new mini-series from the Finimize Community: Finimize Pitch Club. Members submit investment ideas to get feedback from other Finimizers. Give feedback and vote on whether you think this is a buy/sell at the end of the article.
*This is an educational exercise and the investments have not been vetted by our analysts
Today’s pitch comes from community member Professor Rob Dover. An academic specialising in intelligence and national security, and a very small scale retail investor.
A long-term investment in BAE Systems (ticker: BAESY)
A globally connected UK defence prime, with a growing record of diversification and innovation that (with its 4.5% dividend) places it as a ‘hold-forever’ component of a portfolio.
BAE is seen as a UK focused company primarily building long-term defence platforms. It has large exposures in the critical US defence market (and its share ownership base is circa 25% found in the US). It has significant supply routes into the Middle East, South-East Asia and across the NATO alliance. But, more importantly, it has used its hub and spoke ‘prime’ contractor model to acquire and develop wholly owned SMEs in autonomous platforms, cyber security, sentiment analysis, digital biometrics, behavioural science and so on. Utilizing its strong links to universities and defence science in doing so. This diversification ensures its place in the leading edge of security and defence going forward.
It is a cliché to suggest that the world is an ever more dangerous and complicated operating environment, but it is certainly a network enabled environment where everyday adversaries are more difficult to identify, contain and rollback. BAE’s state-based customers are making stronger investments in defence and security (by necessity) and will be drawn to go further by:
Aggressive Chinese defence investments and posturing
Continued upheavals in the Middle East and further investments under a Biden New Deal.
The share price demonstrates BAE’s relative resilience to events and it provides an inflation beating 4.5% dividend. Curiously, the share price was at its lowest during both Iraq wars and their aftermaths (driven by narratives about a failure of the UK government to replace spent armaments, and criticism about the quality of small arms, and light armour). Greater investment in defence and acquiring contracts at the same % success rate should ensure steady growth. Strategic shocks (such as a Chinese invasion of Taiwan, or Russian invasion of the rest of Ukraine) will further reinforce the necessity for government investment in large platforms and high-end agile capabilities. But the historical trend line does not suggest there will be a sudden spike in the share price.
A three-pronged coalescence between geo-political risk (continued trajectory towards instability, below and above threshold conflicts).
The right innovations to overmatch threats (demonstrated through M&A, announced innovations and contracts).
Government willingness to invest (strategic reviews, public announcements).
That this is a mature and well-run business that will continue to innovate, and be integrated in the defence plans of Western governments, delivering steady and sustained growth as a ‘never-sell’ share.
A strategic shock (armed conflict) demonstrates BAE’s equipment to be overmatched by competitors, or is out-sold by competitors (e.g. France in Saudi Arabia). Two-fold mitigation of either diversifying defence holdings, or keeping this share as a confined component of a wider portfolio of equities.
*This stock pitch was submitted on April 29th, 2021
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.