SAABF - Saab AB: Future Outlook Is Positive

2023-03-11 02:16:06 ET

Summary

• Saab's backlog of orders have skyrocketed in 2022 with 20% growth in its 3 divisions.
• The company is well managed with a consistently high F-Score of 6 to 7.
• Increases in government defense spending is boosting Saab's bottom line.

Saab (SAABF) (SAABY) is a Swedish aerospace and defense company founded in 1937. With a market cap. of approximately $7.8 billion USD, the company has a customer base across over 100 countries, and operates under 5 distinct divisions:

• Aeronautics : manufacturer of world-class aircraft systems including unmanned aircraft systems. The Gripen aircraft is one of Saab cornerstone products.
• Dynamics : builds support weapons, missiles, torpedoes, sensors, camouflage, and training systems
• Surveillance : provides security and detection solutions using microwave / antenna technology.
• Kockums : provides development, production and in-house support of submarines, surface vessels and naval systems.
• Combitech : an independent technical consulting company under the Saab umbrella. Its client base come from the manufacturing, service, public, and defense sectors.

Given how countries across the globe are increasing their defense spending , this puts Saab in a good position to expand its market reach and acquire new business.

Saab's Back Orders are Increasing

The total amount of back orders have been steadily increasing in the past few years, and has actually accelerated in 2022 :

2022 saw the largest jump in the past 4 years with an increase of 17.6% in new backlog sales. Converting this into USD, it is an increase from $9.8 billion USD in 2021 to $11.9 billion USD in 2022.

Breaking the above figures down along its 5 divisions, its Dynamics, Surveillance, and Kockums division has shown sales growth of at least 20%:

Note: the reason the total backlog figures are slightly different (In 2022, 128.8 SEK vs 127.7 SEK) is due to rounding.

Only Aeronautics' sales have been flat and its Combitech revenue has dropped.

Aeronautics' revenue has been flat could be due to Saab having trouble finding customers for its Gripen jets. Most Western countries choose to acquire the F-35 instead of the cheaper Gripen fleet. Nonetheless, its total backlog sales have increased by over 17% from the prior year.

Saab's Growth Initiatives:

In the past 18 months, Saab has been steadily increasing its business with new contracts and new bids:

• Early 2023, Saab is ramping up production to 400,000 units a year in ammo and anti-tank weaponry.
• Saab's GlobalEye (surveillance) enters a request for information from NATO. This is to eventually replace NATO's E-3A Sentry with a more modern aircraft.
• Lithuania has awarded Saab with an ammunition contract valued at $13.8MM.
• Saab has successfully completed the Advanced Surface Movement Guidance and Control System (A-SMGCS) project for South Korea's airports in Uljin and Muan.
• Saab is supplying Latvia with a Short-Range Air Defense System.
• An undisclosed Western country has contracted Saab to deliver a defense system valued at $764MM.
• Brazil has received its first shipment of Gripen fighter parts from Saab.
• Saab is building a manufacturing facility in India to produce the recoilless rifle for the Indian armed forces.

Saab Has a Healthy Balance Sheet

In the past 5 years, Saab had maintained a healthy balance sheet. 2022 was a remarkable year for Saab with record profits, but even prior to this, Saab had consistently scored an F-Score of at least 6. The F Score is based on a score between 0 to 9. A score of 0 demonstrates a financially weak company and a score of 9 implies a financially strong company :

During the Covid period, Saab maintained a healthy current ratio of at least 1.60, and its leverage has always been low in the mid-20%.

Its earnings per share took a hit in 2020 but it immediately recovered in the following year and has been increasing ever since. Its dividend payout ratio is also conservative by paying about 30% of its earnings (with the exception of 2019 when dividends were canceled and 2020 when the payout ratio was 58.7%):

Risk: Politics is Driving Saab's Fortune

The recent spike in business for Saab is partially driven by politics, and politics is something Saab has no control over. The war in Ukraine and the threat of a wider-scale war are moving countries towards bulking up their military spending, which is good for Saab.

However, it wasn't too long ago when a lot of Western countries were reluctant to increase their defense spending and were fine with operating older military equipment.

Today, a lot of governments are facing a debt crisis. Argentina is saddled with a $174 billion debt , Pakistan's debt had grown by 25% compared to a year ago, and the US needs to raise its debt ceiling again or risk a default. While everyone is trying to battle inflation and skyrocketing government deficits, it may only be a matter of time before politics swing back towards budget cuts and lower defense spending. A lower government defense budget does have ramifications for Saab.

Saab will definitely be around since it has been operating since 1937, but do not expect rapid sales growth like in 2022 to be the norm.

Conclusion: Saab's a Buy

Putting politics and rapid sales growth aside, Saab is still a well-run company. Its financial statements during Covid show Saab was able to keep turning a profit. Also, to maintain its competitive edge, the company has been steadily increasing its research and development spending:

In the past 3 years, Saab has been spending at least 3.8% of its total revenue on research and development.

Another reason to be eyeing this investment is the company's longevity. Not a lot of companies can boast about being in business for more than 85 years. To have a healthy balance sheet and still be able to compete against other defense contractors speaks volumes about how well Saab is managed.

I do foresee higher growth than usual for Saab (in the short term at least) as defense spending is higher than it has been in years. This growth will only drive Saab's stock price higher.

Even if the higher growth subsides to a more normalized pace, Saab remains a company worth investing in. I'm bullish on Saab.

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