(Updates with Malaysia Typhoon bid in 10th paragraph, U.S. contract charges in 14th paragraph.)
Feb. 20 (Bloomberg) -- BAE Systems, Europe’s largest defense company, fell the most in more than five years after predicting profit will drop as much as 10 percent this year.
Shares of the London-based company retreated as much as 11 percent to 388.10 pence, the most since Oct. 2008, after BAE reported earnings for last year. Earnings per share of 42 pence will drop 5 percent to 10 percent in 2014 amid budget pressure in the U.S., BAE’s biggest market, it said.
BAE said yesterday that after protracted talks the U.K. and Saudi Arabia agreed on pricing terms in the so-called Salam contract to purchase 72 Typhoon jets, padding earnings. The Saudi market is key to BAE Systems at a time when U.S. spending continues to contract and scarce growth prospects in the U.K.
“Saudi Arabia was supposed to re-base the stock, not be a one-off,” Sash Tusa, a London-based analyst at Edison Investment Research said. “It looks like BAE is at peak in Saudi Arabia near-term and the U.S. continues to weaken.”
BAE dropped 48.7 pence in London, and traded at 400.7 pence as of 11:03 a.m. The stock has lost about 8 percent in value this year.
“Budget pressures in some of the group’s larger markets are expected to prevail,” Chief Executive Officer Ian King said in a statement today. “We have started 2014 with good momentum with a settlement on Salam pricing, U.S. budgets in place and a well-defined U.K. maritime sector plan.”
Earnings before interest, taxes and amortization, excluding one-time items last year rose 3 percent to 1.92 billion pounds ($3.2 billion) after a last-minute deal with Saudi Arabia over pricing of Typhoon combat jets boosted 2013 earnings.
Sales from outside the U.S. and U.K. reached 9.3 billion pounds last year after 11.2 billion pounds in 2012. Saudi Arabia contributed 6.4 billion pounds last year, King said.
“This customer has some very real and immediate future operational requirements and we are confident we are going to play a big part in fulfilling those,” King said. The U.K. and Saudi Arabia are in talks about a potential follow-on purchase of Typhoon aircraft.
BAE said it will submit a proposal next month to Malaysia for the lease of Typhoons with a purchase options in a program also contested by other planemakers. Bahrain, Kuwait, and Qatar also may buy Typhoons which BAE makes in partnership with Airbus Group NV and Finmeccanica SpA.
A German decision to cut 37 Typhoon jets will not affect BAE, which has not included the planes in its planning assumption for years, King said.
A U.S. government two-year spending accord has lessened the depth of cuts, with BAE previously assuming a 15 percent decline for its business. U.S. spending is close to “bottoming out,” Chief Financial Officer Peter Lynas told analysts.
“The recent budget developments return some clarity to near-term US government spending, although pressures to reduce spending and address the U.S. deficit are expected to continue,” the company said.
The defense contractor booked a 865 million-pound, non-cash goodwill impairment, partly reflecting lower U.S. spending. The U.S. services business was also hit by $77 million in charges linked to ship work and a troubled contract to run the U.S. Army’s Radford ammunition plant.
Chairman Roger Carr said renegotiating “acceptable commercial terms” on the program are an “immediate priority.”
BAE expects sales in its U.S. land and armaments unit to fall a further 20 percent to 25 percent while revenue will shrink 5 percent at the U.K. platform arm that makes the Typhoon. Sales in electronics and cyber will be little changed, it said.
The company, which last year announced a 1 billion-pound share buyback, has spent 270 million pounds and will accelerate transactions with the Saudi pricing accord agreed, Lynas said.
--Editors: Benedikt Kammel, Tom Lavell