Stock market

Above £13, is there any value left in BAE Systems’ share price?

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gave BAE Systems (LSE: BA) shares have more than doubled since February 24, 2022, when Russia invaded Ukraine. In the past 12 months, which also includes the start of the Israel-Hamas war on October 7, 2023, it has increased by 40 percent.

No one wants wars except those who start them. But defense companies profit from them, as do pharmaceutical companies from disease and infirmity, which no one wants.

Moreover, the purpose of high arms spending is to prevent wars through the effective effect of stronger defenses.

Defense budget ballooning

Many Western European governments believe that if Russia succeeds in Ukraine, it will continue to push westward.

That’s why in February, NATO members pledged to increase their defense spending to 2%+ of their gross domestic product.

The move follows US presidential candidate Donald Trump’s comments that his administration will not protect NATO members who fail to meet the target.

Germany’s IFO Institute has calculated that €1.8trn must be spent to compensate for 30 years of underinvestment in European defence.

Large order book

Given this, rarely a month goes by without the announcement of some major new contract award to BAE Systems.

For example, May 2 saw it awarded an $87 million contract by the US Navy for repair work on one of its ships. The day before saw it win an undisclosed amount of contract to develop two major satellite projects for NASA. And on 24 April it was confirmed that it would be a key developer on Britain’s sixth-generation fighter, the Tempest.

These add to BAE Systems’ already growing order book. This rises from £48.9bn in 2022 to £58bn in 2023. In the same period, its order backlog increased from £58.9bn to £69.8bn.

These led to sales of £25.3bn in 2023 (up from £23.3bn in 2022), and operating profit to £2.6bn (from £2.4bn). For 2024, it expects year-over-year sales growth of 10%-12% and underlying earnings of 11%-13%.

One risk for stocks is that the world will become much safer, which we all hope. The other is any major redesign of the core product line, which would be very expensive.

However, consensus analyst forecasts are for annual revenue and earnings growth of 6.7% and 8.8%, respectively, through the end of 2026.

Earnings per share are expected to grow by 7.1% year-over-year to this point. And the return on equity is expected to be 18.7% by then.

Is there any value left in the shares?

Just because a stock has gone up in value doesn’t mean it has no value left. It may just be that the company is now more capable than before.

In fact, it could be worth more than the current share price. I think this is the case with BAE Systems.

Even with the dramatic rise in its share price, it trades on a key price-to-earnings (P/E) ratio measure of 22.3. It looks very undervalued compared to its peers, with an average P/E of 44.1.

It also looks very low on a price-to-book (P/B) ratio – trading at 3.9 compared to a peer group average of 4.6.

I already own the stock, but if I didn’t, I would buy it today for the low price, and strong growth potential.


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