BAE Systems (LSE:BA) shares have gained considerably this year on the back increased defence spending and Russia’s invasion of Ukraine.
On Thursday, Britain’s biggest defence company reported stronger-than-expected half-year results and announced a new share buyback plan. However, profit dipped from the same period in 2021.
So, let’s take a closer look at BAE’s fortunes and explore whether this stock is right for my portfolio?
Higher costs impact profitability
BAE said that pre-tax profit came in at £779m for H1 of 2022 compared with £1.15bn for the first half of 2021 after booking higher costs. Basic earnings per share fell from 31.3p in H1 of 2021, to 19.6p in the six months to June 30.
However, underlying earnings before interest and taxes (EBIT) rose 8.2% year over year to £1.11bn. Sales also climbed 5% to £10.6bn. The results beat analysts’ average expectations for sales of £10.5bn and underlying EBIT of £1.07bn.
The defence and security giant said it would buy back shares worth up to £1.5bn and upped its interim dividend by 5%.
There were also signs that Russia’s war in Ukraine and the geopolitical situation was leading to increased orders. The group had £18bn in orders during the six months compared with £10.6bn in the same period last year. Its backlog now totals £52.7bn.
“We see further opportunities to enhance the medium- and long‑term outlook as our customers commit to increased defence spending to address the elevated threat environment,” Chief Executive Charles Woodburn said in a statement.
It’s not looking cheap
BAE shares are actually up 41% over the course of the past 12 months. That’s obviously a great return for shareholders. But could it go further?
The stock isn’t overly cheap right now. It trades with a price-to-earnings ratio of 16.3, which is slightly above the FTSE 100 average of around 14.
But that also reflects the fact that investors are confident on BAE’s future with defence spending increasing around the world. Despite the predominance of US arms manufacturers, BAE systems remains a global leader.
However, on the other side it seems apparent that there are supply chain challenges that may continue to impact costs and cause delivery delays. In May, Woodburn reported a “challenging operating environment in the near term”.
Personally, I don’t see too much headroom for share price growth from here.
Would I buy BAE shares?
Are BAE shares right for my portfolio? I’d pass on buying BAE shares today. They’ve risen considerably on the back of an expectation that the business will thrive under the current circumstances.
However, there are still challenges ahead, including supply chain issues and Covid-19. There’s also record inflation and a cost-of-living crisis, pushing up wage costs and other inputs.
BAE also isn’t directly supplying Ukraine with weapons. Instead Western stockpiles are being donated for the fight. So, yes, these weapons will need replacing, but I don’t see this making an immediate impact on BAE’s balance sheet.
For me, much of the revenue potential resulting from the geopolitical situation has already been priced in.
