The BAE share price has lagged the FTSE 100 by 10% in the last month. Time to load up?

Could BAE Systems plc (LON: BA) offer improved performance versus the FTSE 100 (INDEXFTSE: UKX)?

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In the last month, the FTSE 100 has experienced a significant decline. In fact, it has dropped by around 5%, with investors becoming increasingly concerned about the prospect of a full-scale global trade war.

During the same time though, the BAE (LSE: BA) share price has dropped by around 15%. Part of this fall is due to the stock going ex-dividend, but even with this factored in, the company has still significantly underperformed the wider index.

Looking ahead, could it offer recovery potential versus the FTSE 100? And does its valuation now suggest that it is worth buying alongside another stock which released an update on Monday and also seems to offer a wide margin of safety?

Improving outlook

The company in question is data platforms specialist D4T4 (LSE: D4T4). It released a trading update that shows its revenue increased by 194% to £19.95m in the first half of the year. This marked a return to a more normal trading cycle after an unusual phasing seen in the prior year. The company’s adjusted profit is due to be in line with expectations, while its strategic partnerships have moved forward during the period.

The company has made progress in global partnerships, with its addressable market increasing in size. It has also moved ahead with a number of strategic initiatives, while improving its international offering.

Looking ahead, D4T4 is expected to report a 12% rise in earnings in the next financial year. This puts the stock on a price-to-earnings growth (PEG) ratio of around 1.4, which suggests that it could be undervalued at the present time. With it seemingly confident about its long-term growth prospects, the stock could deliver capital growth in the coming years.

Changing business

The underperformance of the BAE share price in recent weeks is clearly disappointing. However, the long-term prospects for the business seem to be gradually improving. The defence industry offers stronger growth than it has done for a number of years, with US defence spending now on the rise following a period of cutbacks. As the biggest spender on its military in the world, the US could prove to be a significant catalyst on the company’s growth outlook.

Clearly, tension involving Saudi Arabia has hurt investor sentiment towards BAE, with the Kingdom accounting for one-sixth of its total sales. While there could be further volatility as political risk remains high, it could also prove to be an opportunity to buy a high-quality company on a relatively low valuation.

For example, the stock now has a price-to-earnings (P/E) ratio of around 16. With earnings forecast to grow by around 9% next year, the company appears to have a bright future outlook. And since its dividend yield now stands at around 3.7%, it could deliver strong total returns in the long run. They could be enough to reverse its recent underperformance versus the FTSE 100.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of BAE Systems. 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.

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