While the FTSE 100 has come under severe pressure in recent months, it could offer superior investment opportunities when compared to buy-to-let. Stocks such as BAE (LSE: BA) may now offer wide margins of safety, as well as improving growth prospects.
In contrast, buy-to-let could experience further tax changes, while housing affordability may remain challenging for first-time buyers. As such, now could be the right time to buy the defence stock in my opinion alongside another industrial company which released an encouraging update on Wednesday.
Consistent performance
The stock in question is technical products and services specialist Diploma (LSE: DPLM). Its first quarter trading update showed that it has been able to trade in line with expectations. Revenue in the period increased by 9%, while its operating margin was as per expectations.
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The company’s Life Sciences sector delivered sales growth of 4%, also recording encouraging growth across several revenue streams. Its Seals segment reported 2% sales growth which was driven by strong trading in its international business. Its Industrial OEM (original equipment manufacturer) business was hit by delays in deliveries, although demand remained robust during the quarter. In its Controls segment, revenue increased by 24% as a result of previous acquisitions.
With Diploma having recorded five successive years of earnings growth, it appears to offer a robust financial outlook. It is expected to deliver a 9% rise in net profit in the current year, and this could help to improve investor sentiment. With the company also reporting a change in CEO alongside its trading update, it could record improving financial performance over the long term.
Low valuation
Also offering improving financial prospects is BAE. The company is expected to report a rise in earnings of 9% in the current financial year. Since its shares have fallen by 15% in the last year, they now trade on a price-to-earnings (P/E) ratio of around 10.8. This suggests that they could offer a wide margin of safety and may be able to deliver improving performance over the long run.
Of course, there are risks facing the company. Notably, there is still geopolitical uncertainty regarding one of its key customers, Saudi Arabia. As well as this, the prospects for the world economy continue to be uncertain, with the potential for a full-scale trade war having the capacity to hurt the company’s financial outlook. And, following US mid-term elections, defence budgets may not rise as quickly as had been expected by the market.
Despite these risks, BAE appears to offer growth potential as defence budgets across a number of major economies are forecast to rise over the medium term. Certainly, further share price volatility could be ahead. But at a time when interest rates in the UK are expected to rise and tax changes are reducing the appeal of buy-to-let properties, buying a slice of the FTSE 100 defence stock could prove to be a sound long-term move.
