BAE Systems (LSE:BA.) shares are among the biggest winners over the past 12 months. The multinational arms, security, and aerospace company has repeatedly backed its growth position amid a highly positive environment for the firm’s operations.
So let’s take a closer look at this weapons producer and see whether it is right for my portfolio.
Outperforming the market
BAE Systems shares are up 77% over two years. That’s phenomenal growth for a £26bn company. So a £500 investment two years ago would be worth around £890 today.
That’s certainly more of a return than I would have been expecting. I can also add dividends to that which would be worth around £50, given the dividend yield would have been closer to 4% at the time of purchase.
During this time, the FTSE 100 is up around 20% — which is impressive, but it has risen from a low starting point. So it’s clear BAE has outperformed the index by some distance.
What’s behind the surge?
In an update towards the end of 2022, the company said a weaker pound would provide a tailwind for reported annual earnings and sales, adding that it expected more growth in 2023 due to an “elevated threat environment“.
Barclays believes the UK’s largest defence firm can report double-digit earnings per share growth of 12%, compared to 2021, at 53.7p. Analysts at the bank suggest that the order book will have grown by 45% to around £31bn.
Meanwhile, pre-tax earnings could come in around £2.45bn, up from £2.2bn. Revenue is expected to hit £23bn, up from £19.5bn. These figures, if they come to fruition, demonstrate the material impact of a weak pound and increased defence spending.
The strong order book has been reinforced by commitments on defence spending in the UK and elsewhere around the world in the wake of Russia’s invasion of Ukraine. The leader of the opposition, Keir Starmer, has also committed to replenishing the British military should Labour win the next election.
Should I buy BAE Systems stock?
BAE Systems trades with a price-to-earnings (P/E) of 17 and a forward P/E of 15. That’s a little over the index average, but largely reflects the belief that the company will continue to grow over the next decade, amid an increasingly threatening geopolitical environment.
If I was going on fundamentals alone, I would buy this stock. But there are two things that concern me. Firstly, I don’t tend to buy stocks on a bull run — it’s up 42% in 12 months. And secondly, the share price is highly impacted by geopolitical events — such as the US’s flying-object purge.
The share price can jump or fall, more than other stocks, depending on government commentary and narratives. And right now, I don’t like that as it means the stock could become detached from its fundamental data.
