The BAE Systems (LSE:BA.) share price soared last year. But even with a 30% gain, it just about made it into the top 25 performing FTSE 100 stocks.
That said, its solid gain isn’t just limited to 2023. Over the past five years, it has grown investors’ money by 21% a year. That’s enough to turn a £10,000 investment into almost £26,000, including dividends. Impressive.
Rising price
The share price was aided by the firm’s strong financial performance, increased orders and higher dividend awards.
BAE operates in multiple business areas within aerospace and defence. Global defence spending rose in 2023 and this trend was driven by conflicts in Ukraine and the Middle East.
BAE benefited from several government and private initiatives. For instance, it will play a key part in helping Australia to purchase its first nuclear powered submarines.
It also received new investment worth £700m from the Ministry of Defence to build on innovation for the UK’s future combat aircraft.
There were many other contracts announced too.
Profits, profits, profits
Overall, the first half of 2023 saw orders up 17% to £21.1bn. Another £10bn of sales followed up to November.
BAE is a profitable, and well-run business. As such, it managed to convert sales into profits and cash flow. In fact, its free cash flow more than doubled to £1.1 bn. This is exactly what I like to see.
Some companies can grow sales but not profits. Yet profitability is what’s most important, in my opinion.
It also achieved a record order backlog of £66bn. Note that many of the major defence contracts secured now are executed over many years, which provides excellent visibility for future earnings.
Looking ahead
The group’s industry is addressing the many security challenges in multiple parts of the world. And demand for BAE’s equipment, technology and services are likely to climb, in my opinion.
With major elections taking place in 2024, misinformation campaigns are a growing concern too. Cyber security is likely to be a key area of focus and it’s also one of BAE’s business areas.
That said, the share price could be adversely affected by geopolitical developments. For instance, any signs of conflicts easing (which we all hope for) could cause a drop in its share price.
Being awarded contracts is just one part of the equation. It’s also important that BAE manages to execute on its projects. Cost overruns are a risk and could damage profitability and reputation.
Growth at reasonable price
I’m frequently searching for quality stocks that offer growth at a reasonable price. These are sometimes referred to as GARP shares.
Some of the metrics that I look for include a double-digit return on capital employed, a double-digit profit margin, steady earnings growth and a solid balance sheet.
BAE Systems ticks all these boxes. In addition, it offers a 3% dividend yield.
With a price-to-earnings ratio of 17, it’s not the cheapest it has been over the past decade, but nor is it the most expensive. Given that it operates in a structurally growing industry, it doesn’t look expensive to me at all.
If I had spare cash in my ISA, I’d buy these shares today for 2024 and beyond.
