Has the BAE Systems share price become too expensive?

The BAE Systems share price was among only a handful of stocks to push upwards on Friday 10 November. Has it rallied too far?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Caucasian man making doubtful face at camera

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The BAE Systems (LSE:BA.) share price is up 36% over one year and 91.7% over two years. It’s among the most successful stocks on the FTSE 100 in this respect, rallying on the back of increasing global tensions and war in Ukraine and Israel/Gaza.

The extent of the rally is interesting, because, for a while now, there’s been clearer value opportunities on the index. But the markets aren’t always rational, and positive sentiment is a valuable and scarce commodity.

The below chart shows the broad positive sentiment towards the stock over the past 12 months. This sentiment was also reinforced on Friday (10 November) as BAE Systems was among only five stocks to push upwards in the morning’s trading.

Created at TradingView

Target price

The share price has been pushing up, but it’s getting close to its average target share price. At the time of writing, the actual share price is £11.11 while the average target price established by brokerages is £11.51.

In turn, this suggests that the fair value for the stock — at least according to the analysts that follow it — is just 3.6% higher than the price at this moment in time. Companies that investors suggest are ‘good value’ don’t tend to trade this close to the target price. By comparison, Barclays is trading 36% below its average target price.

Of course, there’s another way of looking at it. Brokerages don’t upgrade their forecasts all that often — maybe every few months at most. As such, there can be something of a lag, and that’s more apparent when a company’s prospects are improving.

For example, the Israel-Hamas conflict has been something of a catalyst for the BAE share price. However, many brokerages won’t have updated their assessments of the defence manufacturer since the war started. So, that needs to be factored in.


UK stocks often trade at a discount to their US peers. This is one of the reasons we’re seeing companies increasingly look to the States for an initial listing rather than the UK.

However, as we can see below, BAE actually trades at a premium — just — to defence and aerospace giant Lockheed Martin but at a discount to RTX Corp — formerly known as Raytheon.

Created at TradingView: N.B. on a non-GAAP basis RTX trades at only a slight premium to BAE.

Of course, the price-to-earnings (P/E) valuation is just one metric. When we look at others, the three companies appear to trade broadly in line with each other.

BAELockheed MartinRTX
P/E non-GAAP16.516.316.7
PEG Forward (non-GAAP)
EV-to-EBITDA Forward11.312.512
Price-to-Cash Flow8.314.715.1

One of the most illuminating metrics here is the PEG forward. Essentially this is the P/E divided by expected annualised growth rate of five years. BAE’s non-GAAP P/E of 16.5 is divided by a forecast annualised growth rate — which here appears to be about 13.5% — and that gives us a 1.2 PEG ratio.

Clearly, using the data above, analysts believe that BAE will grow much faster than its US peers in the coming years.

Geopolitics has a huge influence on these company’s share prices. A new detente probably wouldn’t be good for the share price. However, the data suggests BAE could still represent good value.

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.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems and Lockheed Martin. 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.

More on Investing Articles

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »

Investing Articles

Here’s my Rolls-Royce dividend forecast for 2024-27!

Our writer considers whether the Rolls-Royce dividend might be reinstated in coming years, based on financial performance and stated payout…

Read more »

Investing Articles

What would I do if Rolls-Royce shares plunged 50%? History suggests a big decline is coming

While Rolls-Royce shares have delivered massive outperformance in recent years, they also have a history of significant declines.

Read more »