The FTSE 100 is full of established UK companies, and while it has a reputation for being boring in comparison to US tech stocks, but boring can also mean bargains. These two FTSE 100 stocks have fallen back recently. But in both cases, business performance remains strong. As such, I think that both have significant upside potential heading into 2022.
A defensive FTSE 100 stock
BAE Systems (LSE: BA) is defensive in both senses of the word. Firstly, it operates in the defence and aerospace industry, and is one of the global market leaders. Secondly, due to several recurring contracts with governments around the world, revenues are fairly secure. This means that it normally holds up quite well in the event of a stock market crash. Even so, the BAE share price has fallen over 6% in the past month, a disappointing end to a year in which it has managed to rise around 8%. I feel this slight dip offers a great time to buy.
Indeed, in the forward guidance offered in the half-year report, things certainly looked positive. For example, the group said that it expected sales growth of 3%-5%, and underlying EBIT growth of around 7%. This has also been forecast based on an exchange rate of $1.35 to £1. However, in recent months, the pound has weakened, and the exchange rate is currently $1.32 to £1. This should benefit BAE, because it earns a significant amount of revenue in US dollars yet reports in British pounds.
I am also tempted by the company’s dividend, which rose another 5% this year. As such, it currently yields close to 5%, far higher than other FTSE 100 stocks. A recent share buyback programme of £500m also demonstrates that it’s in a strong financial position.
As such, although there are the risks of inflation, and the fact that government defence spending is not increasing at a similar rate, I still believe that BAE is well-equipped to deal with these. I may add more BAE shares to my portfolio at its current price.
Paper and packaging company
Mondi (LSE: MNDI) is another FTSE 100 stock that has dipped recently, falling by around 12% in the past three months. Over the past year, it is up 7%, however. But I still think the stock is too cheap.
Indeed, the company has been performing well this year. This included revenue for the first half of the year rising around 5% to over €3.6bn. Further, in the most recent quarter, underlying EBITDA was up 27% from the previous year, reaching €388m. This signals that there is significant demand for Mondi’s products, which are recognised for their sustainability. So, as e-commerce continues to rise in popularity, I feel that demand will increase further.
There are some risks, however. For example, the company has recently highlighted rising costs due to inflationary pressures. There are also planned maintenance costs for the fourth quarter of 2021, and although these will hopefully benefit Mondi in the long term, this is likely to have a substantial impact on profitability in the short term. Nonetheless, I see these as short-term issues, and I’m generally optimistic. Therefore, I may also add more Mondi shares to my portfolio in the new year.
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Stuart Blair owns shares in BAE Systems and Mondi. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.