Defensive Defense Stock: Saab
With rising energy prices threatening commercial aviation, aerospace and defense stocks haven't fared well in the global equities downturn. Year-to-date, according to an index tallied by FactSet Research Systems, the stocks of aerospace and defense companies worldwide have dropped 19% in dollar terms, versus an aggregate decline of 14% across all sectors globally.
At least one aerospace and defense stock, however, has bucked the year-to-date trend: Saab, the Swedish maker of military aircraft, aviation components and command and control systems.
The share price for the Stockholm-headquartered company, not to be confused with the auto brand now owned by General Motors (nyse: GM - news - people ), is up 17% so far in 2008.
Even with the uptick, Saab still looks cheap. Its Stockholm-listed shares sell for just 10 times the average analyst estimate for 2009 earnings per share. Contrast that with equivalent multiples of 12 for Lockheed Martin (nyse: LMT - news - people ) and 13 for Raytheon (nyse: RTN - news - people ). Those interested in international investing should put Saab on their radar screen.
"In this turbulent time, we believe investors will appreciate this type of company more and more," says Mikael Laséen, a Stockholm-based analyst at Kaupthing Bank, speaking of Saab. "It is of course a political risk, but clearly you don't have to worry about the business cycle and consumer spending that much."
Why isn't consumer spending too big a concern? For one thing, 81% of the company's $3.6 billion in 2007 revenues was from military customers. Beyond its flagship Gripen fighter jet, Saab makes military systems such as airborne surveillance systems (Pakistan is a customer); an anti-armor weapon that has been bought by 40 countries; and unmanned aerial vehicles, including an unmanned helicopter in development.
Saab does have some commercial exposure to two high-profile programs that have suffered delays: the 787 jet from Boeing (nyse: BA - news - people ) and Airbus' A380. Yet if revenues from those programs failed to materialize, by Laséen's reckoning the result would be at most a 5% dent in Saab's 2009 sales.
As for political risk, Laséen points to a cloudy outlook for European defense budgets, particularly for Saab's hometown customer, Sweden. He expects Swedish military budgets to drop by a couple of percentage points.
But that decrease, he suggests, should gradually take place over the course of a few years. Meanwhile, Laséen sees pockets of export potential for Saab, particularly for its Gripen fighter. Potential buyers: Brazil, Norway, Romania and Switzerland. Brazil is looking to order three dozen fighter jets, a number that could potentially rise to 120, with a proposal likely at the end of July.
Saab faces competition in these bids. The Gripen goes up against jets like Lockheed's F-16, the F/A-18 from Boeing and the Typhoon from BAE Systems (other-otc: BAESF.PK - news - people ), as well as Russian and French offerings.
The competitive challenge hasn't spooked security analysts covering Saab. Of the eight reporting on the stock to Thomson Financial, six have bullish ratings.
The consensus figure estimate among them for Saab's year-over-year earnings growth stands at 8% for 2009 and 7% for 2010.
What might help that growth along? One is a push into the U.S. market. Last week, Saab announced a partnership with Sensis, an up-and-coming U.S. air surveillance concern, to promote Saab's radar systems. "This cooperation will remove barriers for future sales," said Saab Vice President Lennart Joelsson in a statement. (Saab, citing an upcoming earnings release, declined to speak with Forbes on the deal.)
The accompanying table shows Saab and other international aerospace and defense concerns, all with current price-to-earnings ratios below five-year averages. From the table, we would suggest stocking up on Saab
and BAE Systems, thanks to their relatively small exposure to commercial aerospace