Interactive Investor

Two hot FTSE 100 stocks brighten up a miserable day

2nd August 2023 15:50

by Graeme Evans from interactive investor

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With global stock markets skidding lower, we pick out a couple of blue-chip companies heading in the opposite direction.

Double rainbow 600

Big upgrades to guidance today reignited interest in BAE Systems (LSE:BA.) and medical products group ConvaTec Group (LSE:CTEC) as their shares raced clear at the top of the FTSE 100 index.

The technology-led defence, aerospace and security business returned to within sight of April’s record high of 1,037p by adding 51.8p to 985.2p on the back of interim results.

Analysts at UBS, which had a price target of 1,100p prior to today’s update, said BAE’s beat over City forecasts looked to be “high quality” after underlying earnings rose by 10% to £1.3 billion and earnings per share (EPS) by 17% to 29.6p.

The blue-chip company went further by lifting full-year guidance on its four key financial metrics, including a revision to EPS growth to 10-12% from 5-7%. Free cash flow estimates for 2023-25 are now £500 million higher at £4.5 billion-£5.5 billion.

The stronger outlook has been underpinned by a record order backlog of £66.2 billion, reflecting the current elevated global threat environment and BAE’s international presence and diverse portfolio of products and services.

Its largest orders in the period included a £1.8 billion contract award from the Czech Republic to produce 246 CV90 MkIV infantry fighting vehicles in seven different variants.

In Air, it agreed to continue to provide Saudi Arabia with Salam Typhoon support services for a further five years through to the end of 2027 valued at £3.7 billion. And in Maritime, BAE received additional funding of £2.4 billion on the Dreadnought class submarine programme.

A strong balance sheet with a cash position of £3.2 billion means the company has topped up the current £1.5 billion buyback programme by the same amount. An interim dividend of 11.5p a share is due to be paid on 30 November, representing an 11% increase.

UBS said: “Sentiment on defence names has been tempering recently and we do not believe investors had strong positioning into the print, and this could help to revitalise interest in the space.”

Convatec, whose shares have struggled for momentum since entering the top flight in September 2022, put on 13.2p at 219p after its operating profit of $214 million (£168.4 million) came in slightly ahead of City expectations.

The company is focused on solutions for the management of chronic conditions, with leading market positions in advanced wound, ostomy, continence and infusion care. Revenues for the six months rose 6.6% when adjusted for the exit of certain businesses.

The strong performance by all four of its divisions means the company now expects revenues growth of between 6%-7.5% this year, compared with 5%-6.5% previously. Its forecast for an operating profit margin of at least 20.5% is up from 19.7% as part of a longer-term ambition to reach the mid-20s.

Peel Hunt and Investec said the results, which included a 3% increase in half-year dividend to 1.769 cents, would require them to revisit their respective price targets of 250p and 267p.

The latter said it was encouraged by positive signs of accelerating top-line growth and margin enhancement: “We believe there is scope for further margin improvement, a result of both efficiency gains and new product launches.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  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 adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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