Up nearly 40% in a year, should I buy at today’s BAE Systems share price?

With strong earnings growth and improved free cash flow, is the BAE share price attractive to me at current levels?

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Key points

  • Between the 2017 and 2021 calendar years, revenue grew from £17bn to £19.5bn
  • The aerospace and defence firm has a lower trailing P/E ratio than major competitor QinetiQ
  • JP Morgan recently increased its price target from 630p to 710p, despite maintaining its ‘neutral’ stance

While many companies’ share prices have fallen during the recent market sell-off, the BAE Systems (LSE:BA) share price has increased. The primary reason for this is the anticipation of the greater requirement for military hardware during the awful war in Ukraine. It is up 10% in the past week and 39% in the past year. Currently it is trading around 705p. So should buy shares for my long-term portfolio? Let’s take a closer look. 

Strong results and the BAE share price

The war in Ukraine is a horror and we all hope it ends soon. But BAE has been doing well for a while. For the 2021 calendar year, the firm reported that free cash flow had increased to £1.8bn. This had risen from £1.3bn in 2020. Furthermore, net debt fell to £2.1bn from £2.7bn in 2020. Sales increased to £21.3bn, up from £20.9bn the previous year. This strongly suggests that this aerospace and defence company is moving in the right direction in general. 

In addition, earnings-per-share (EPS) grew between the 2017 and 2021 calendar years, from 42.1p to 47.8p. By my calculation, this is a compound annual EPS growth rate of 2.5%. While there are many other businesses with higher EPS growth, this is extremely consistent. Over the same time period, revenue also increased from £17bn to £19.5bn.

Is the firm cheap?

By looking at a company’s price-to-earnings (P/E) ratio, I may be better able to assess whether it is under- or overvalued. BAE Systems has a trailing P/E ratio of 11.94. This is significantly lower than major competitor QinetiQ. This latter business has a trailing P/E ratio of 20.55. It is therefore possible that the BAE share price is cheap at current levels.

Furthermore, investment bank JP Morgan recently increased its target price on the company, despite maintaining a ‘neutral’ stance. It raised its target price from 630p to 710p. The justification for this rise was the escalating military situation. JP Morgan said it would not be surprised if US President Joe Biden sought an increased defence budget in the near future.

This is a change from December 2021, when the investment bank downgraded BAE Systems on account of its exposure to the US market. It had stated that this market was “now in a slowdown” and that this exposure could be detrimental to the business. In addition, any resolution to the current military conflict could lead to an immediate sell-off of shares. 

Overall, the BAE share price is evidently performing well while others are suffering badly. Underpinned by strong growth and solid free cash flow, this firm is in a good financial position. I will be waiting to see how the current conflict in Ukraine pans out as I do not want to buy a share on the back of a human tragedy like that. But I will not rule out a purchase in the future.

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.

Andrew Woods has no position in any of the shares mentioned. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. 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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