BAE Systems shares look dirt cheap!

After its first-half update last week, BAE Systems shares got a small boost. Despite this, I think they’re still looking surprisingly undervalued.

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BAE Systems (LSE: BA.) posted its first-half results last week. The shares went up on the news.

The results were terrific, to be fair, increasing in a lot of key metrics.

But what surprised me is how undervalued the shares still look. This might be a dirt cheap buy. 

On those results, here are the headlines:

  • Order intake of £21.1bn
  • Order backlog up to a record £66.2bn
  • Sales increased by 11% to £12.0bn
  • Earnings per share increased by 17% to 29.6p

What stands out to me most is the order backlog. A defence company is completely reliant on its orders, and it’s clear that governments around the world are keen to buy the products and technologies BAE Systems offers. 

Take the Eurofighter Typhoon for instance. It’s one of the most advanced fighter planes in the world and BAE has a key role in producing it. The result is that the firm has an economic moat, a competitive advantage that can’t be taken away.

Defence spending is on the up too. Worldwide spending hit an all-time high of $2.2trn last year, rising for the eighth year in a row. While that’s nothing to celebrate in terms of ongoing global conflicts, it does mean that I’d expect sales to be strong in years to come. 

Cheap P/E

Putting it together, we have a company with a strong moat and record orders in a growing industry. These are all prized qualities. I’d expect to see this reflected in a weighty valuation. And well, it’s just not the case here. 

BAE Systems trades at around 16 times earnings. For a company with good growth prospects, I’d expect that to be higher. For context, it’s lower than the FTSE 100 CAPE (a 10-year P/E average) of around 17.

I will say that the shares are at an all-time high right now at £10.18, boosted by last week’s results. But this is normal for growing companies. They always tend to be near their highs as the line keeps going up.

If it is so cheap, what’s the reason for it? Well, ESG issues are one cause. Many investors may not want to buy shares in a company that makes weapons. Firms like BAE are excluded from some funds for this same reason. Less demand will lead to a cheaper price.

Best FTSE 100 bargain?

Another reason is that London seems to be undervalued at the moment and has been for a while. On the one hand, this might offer some bargain stocks and BAE might be one. On the other, it might be due to structural problems in this country that aren’t going away any time soon.

Whatever the reason, I do think this is one of the better bargains on the FTSE 100 right now. Is it dirt cheap? It just might be. I’d buy some shares if I had the spare cash.

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.

John Fieldsend has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems. 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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