As BAE Systems’ share price heads towards £14, is there any value left in it?

BAE Systems’ share price has soared since Russia invaded Ukraine, but it still looks very undervalued and has great growth prospects in my view.

| 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.

Arrow symbol glowing amid black arrow symbols on black background.

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.

Just because BAE Systems’ (LSE: BA) share price has soared since Russia invaded Ukraine does not mean there is no value left in it.

The rise in price might simply reflect that it is worth more now than it was before. Or that the market is just playing catch-up with the value of the firm.

Indeed, in my experience, a share may be worth much more than even an elevated share price reflects. I think this applies to BAE Systems.

Should you invest £1,000 in Lloyds Banking Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?

See the 6 stocks

Are the shares undervalued?

To ascertain whether this is true, I started by looking at the key price-to-earnings (P/E) ratio stock valuation measurement.

It currently trades at a P/E of 22.4. This compares to the average P/E of its peer group of 44 – so it is very undervalued on this basis.

The same is true on the key price-to-book (P/B) ratio as well. BAE Systems trades at a P/B of just 3.9, against a peer group average of 4.6.

Created with Highcharts 11.4.3BAE Systems PriceZoom1M3M6MYTD1Y5Y10YALL13 Jun 201913 Jun 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242024www.fool.co.uk

Therefore, on both key measures the shares still appear to offer a high degree of value.

A worsening global security backdrop

Much as none of us want it, global insecurity has dramatically increased since Russia’s 24 February 2022 invasion of Ukraine.

In response to this and other rising threats, many countries have vowed to increase their defence spending.

In February, NATO members pledged to increase theirs to 2%+ of their gross domestic product (GDP). Germany’s IFO Institute calculated that €1.8trn must be spent to compensate for 30 years of under-investment in European defence.

April saw the UK commit to spending at least 2.5% of its GDP each year on defence by 2030.

Strong business growth

One risk to the company is that the world becomes safer, although it is something we hope for. Another is any major redesign of a core product line, which would be very costly.

However, even before this new expenditure, BAE Systems’ order book ballooned to £58bn in 2023 from £48.9bn in 2022.

Over the same period, its order backlog jumped to £69.8bn from £58.9bn. These drove sales of £25.3bn in 2023 (up from £23.3bn), and operating profit to £2.6bn (from £2.4bn).

On 9 May, it said it is on track to achieve 6%-8% earnings per share growth this year on revenues 10%-12% higher.

So will I buy more?

BAE Systems is one of just a handful of growth shares that I did not sell when I turned 50 a while back.

At my stage in the investment cycle, I am focusing on shares that pay high dividends. This will allow me to increasingly live off those while further reducing my working commitments.

The defence firm does pay a dividend – currently yielding around 2.2%. So, unlike non-dividend-paying growth shares – which must be sold to realise any profit – this does provide a regular return.

However, it is nowhere near the 8.5%+ average I am making on my core high-yield holdings.

Nonetheless, given its significant undervaluation in my view, and terrific growth prospects, I will add to my holding soon.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

Simon Watkins 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.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »