As a result of geopolitical tensions, BAE Systems (LSE: BA.) shares have outperformed the market by a wide margin lately. Over the last year, they’ve risen about 35%. Over the last three, they’ve gained about 160%.
Is it too late to buy the defence company’s shares today? Let’s discuss.
Strong outlook
In order to answer the question, I’m going to look at three main factors – the outlook for the company, the stock’s valuation, and broker price targets. I think together, these factors should provide a good idea of whether the shares are still worth buying.
In terms of the outlook, I see it as pretty strong, especially after the recent developments in the Middle East. Put simply, governments can’t afford to take defence lightly. So spending within the industry should remain healthy in the years ahead.
It’s worth noting that in BAE Systems’ H1 results, it reported a record order backlog of $66.2bn.
The company also raised its H1 dividend by 11%. That says a lot, in my view. A double-digit increase to the payout suggests management is very confident about the future.
Fair valuation
Moving on to the valuation, analysts expect BAE to generate earnings per share of 62.4p for 2023 and 67.6p for 2024.
This means at the current share price of 1,100p, the forward-looking price-to-earnings (P/E ratio) is about 17.6, falling to 16.3 using next year’s forecast.
Now, at those P/E ratios, I don’t see a huge potential for multiple expansion. However, I also don’t see the multiples as stretched.
So in terms of the share price outlook, I reckon a lot will come down to earnings per share growth. If the company can increase its earnings I see no reason why the share price can’t move higher.
It’s worth noting here that share buybacks (the company recently launched another £1.5bn buyback) should help to increase earnings per share.
Share price targets
As for broker share price targets, it’s encouraging to see several have price targets higher than the current share price.
Recently, Berenberg increased its target price to 1,170p from 1,050p (and raised the stock to ‘buy’ from ‘hold’). Meanwhile, a few months ago, JP Morgan put a price target of 1,150p on the stock.
These targets indicate that brokers can see the stock moving higher.
My view
Putting this all together, my take is that it’s not too late to buy BAE Systems shares today. I reckon they can continue to provide solid returns from here.
A dividend yield of around 2.7% should help in terms of returns.
Of course, there are no guarantees. As always, there are stock-specific risks to consider. For example, the recent acquisition of Ball Aerospace could backfire. And after the strong run the shares have had, there is always the risk of a pullback.
All things considered however, I believe the shares will continue to provide healthy returns from here.
