Is there any value left in the BAE Systems share price?
The BAE Systems (LSE:BA.) share price has been the eighth-best performer on the FTSE 100 over the past five years. Those investing £10,000 in September 2020 will now (at close of business on 9 September) be sitting on a profit of £25,276. They will also have picked up some reasonable dividends (152.6p a share) along the way. This means their overall gain is £28,279.
A question of conscience
But itâs a sad reality that much of this paper profit was recorded after Russia invaded Ukraine. Understandably, this doesnât sit comfortably with everyone.
Personally, I believe thereâs nothing wrong with making money out of a company thatâs helping a country defend itself. After all, BAE Systems is the Ministry of Defenceâs largest contractor and one of the 10 biggest suppliers to the US Department of Defense.
However, I have to admit that President Trumpâs recent decision to change the name of the latter to the War Department undermines my argument a little. Nonetheless, as long as a companyâs engaged in legal activity and pays its taxes, I think itâs okay to consider investing.
Missing the boat
A look at the 12-month price forecasts of analysts suggests that the rally isnât over yet. They have an average (median) target of £21.64. This is 20.8% higher than todayâs price.
Iâm sure some of this optimism was helped by the groupâs results for the six months ended 30 June (H1 25). Compared to H1 24, sales were up 11% and underlying earnings per share increased 12%. It also upgraded its revenue and profit forecasts.
Surprisingly, the group also reported a £2.4bn drop in its order book during the period. Having said that, it still stands at £75.4bn, which is larger than the UK’s annual defence budget.
Some challenges
One concern I have is that the group suffered a £587m swing in its free cash flow. For H1 24, it saw an inflow of £219m. During H1 25, there was an outflow of £368m. The company puts the decline down to a timing issue rather than an indicator of anything fundamentally wrong.
And its shares arenât cheap. Based on a current price of £17.92, the stock trades on a multiple of 26 times its historic (2024) earnings. Using current forecasts, this drops to 23.6 (2025) and 21.1 (2026). Admittedly, this isn’t in bargain territory but itâs likely to be a bit more attractive to value investors when itâs considered alongside the forecast 2025 Rolls-Royce price-to-earnings ratio of 43.6.
Final thoughts
But I remain optimistic that the group can support an above-average valuation through strong growth.
It says its key markets are worth $1.75trn a year so thereâs plenty more revenue to go after. NATO members have committed to increasing core military spending to 3.5% of Gross Domestic Product by 2035. Being an industry leader in a growing market is likely to be lucrative.
To give further earnings protection, the group covers all aspects of defence â land, sea and air â which puts it in a strong position when looking for new customers. It undertakes multi-decade programmes (secured by long-term contracts) that aren’t affected by the ups and downs of the normal economic cycle.
The stockâs also yielding a solid — if unspectacular — 1.9%. For these reasons, BAE Systems could be one to consider.
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James Beard has positions in Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. 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.
