After its share price rose 13.9% in the first half of the year, I’m wondering what the rest of 2024 could have lined up for BAE Systems (LSE: BA.).
It outperformed the FTSE 100 during that time, which shot up 5.7%. The aerospace and defence player is up 42.2% in the last 12 months and 153.9% in the last five years.
That said, it’s down 9.5% from its 52-week high. Does that open an opportunity for investors?
More gains to come?
What could support a rising share price? Well, valuation’s one thing.
Its current price-to-earnings (P/E) ratio of 21.2 doesn’t scream bargain. Nonetheless, I think it’s fair value for a business of BAE System’s nature.
It’s a mature industry titan with plenty of strong characteristics. Looking ahead makes for a slightly better reading, where its forward P/E comes down to 19.7.
Increasing demand
So with the stock looking like decent value, what else could drive its share price? An ongoing rise in demand is one thing.
The stock has soared in the last few years following an uptick in the need for civil aviation in the post-pandemic era as well as increased defence spending. Off the back of that, the business had a strong 2023 with sales rising 9%, operating profit rising 8% and its order backlog jumping 18.5%.
More widely, demand is expected to keep climbing as NATO members have committed to increasing their defence spending to at least 2% of gross domestic product (GDP).
Former Prime Minister Rishi Sunak laid out his plan for 2.5% of the UK’s GDP to go on defence spending. The newly elected Keir Starmer has promised to uphold this. That said, there’s no clear timetable for when the UK will hit the target.
There’s also the current geopolitical landscape to consider. The ongoing war between Russia and Ukraine as well as the Israel-Hamas conflict will put governments across the world on high alert and could see spending rise further.
All of the above is certainly an indication we could see its share price keep heading in the right direction.
The threats
Then again, I do see risk for the stock. First, it’s taken a hit after plane maker Airbus released a profit warning in June. BAE works closely alongside Airbus, so this could have negative implications.
On top of that, should the Russia-Ukraine and Israel-Hamas wars end soon, as we all hope, this could see a reduction in spending from key nations. Donald Trump has vowed to end the war in Ukraine by January 2025, if elected, so that could be weighing on investor sentiment.
A closer look
As much as I’d like to put a price tag on where BAE Systems could end 2024, quite frankly, no one knows. As we’ve come to learn, the stock market’s full of surprises.
That said, analysts see its share price rising over the next year. They have an average 12-month target price of 1,443p. That’s a 12.7% premium from where it’s at right now.
It may never climb that high. Analysts’ predictions can be wrong. But I’d have to agree that I see the share price continuing its fine form in the upcoming months. It’s a stock I’ll be investigating further in the weeks ahead.
