BAE Systems (LSE: BA.) has been in the shadow of Rolls-Royce Holdings in 2024, with its share price falling back since November.
It’s up 5% year to date, but a 94% gain for Rolls-Royce puts it firmly in the shade.
We’re looking at a 140% rise for BAE shares in the past five years, so it’s still been a big success story since the 2020 stock market crash.
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What next?
BAE will deliver full-year 2024 results on 19 February. And judging by November’s trading statement, things are on track.
CEO Charles Woodburn said “Our operational and financial performance so far in 2024 reaffirms our confidence in achieving the upgraded full year guidance we issued at the half year“.
That guidance suggests a 14% rise in sales, with underlying EBIT also up 14%. Earnings per share (EPS) should see a 9% increase. And the company upped its cash flow guidance by £200m to more than £1.5bn.
The BAE board said it expects “over £6.0bn of free cash flow for the three year period ending 2024“. All round, it sounds like a pretty good year.
Bullish brokers
Through 2024, analysts have been issuing a stream of Buy recommendations. On 10 December, Berenberg Bank reiterated its Buy stance, and upped the price target to 1,440p.
That would mean a 23% rise from the 1,168p at the time of writing (19 December).
Back in July, JP Morgan Cazenove had a 1,500p target, for a 28% boost. And that was a week before BAE raised its full-year outlook at interim time.
It’s hard to find a City analyst who’s negative on BAE, with only two out of 17 that I can see expecting underperformance.
Consensus
Broker recommendations and price targets have to be treated carefully. It seems to me that they’re more likely to err on the positive than the negative side when faced with uncertainty.
But comparing their current range of projections for BAE with Rolls-Royce shows a marked difference in confidence.
We’re looking at a price target range of 1,180p to 1,670p for BAE. Those are all positive, with even the bottom end of the range just ahead of the current price.
But targets for Rolls range from 240p to 850p. The most optimistic thinks we could see a 45% climb on top of the 2024 gains we’ve already had. But at least one of them fears a fall of almost 60%.
Dangers ahead
Why the recent BAE share price weakness? It seems like there are fears of US defence spending cuts when the new administration takes over.
I also think we could be seeing shareholder negativity on two fronts. I expect some will see a forecast price-to-earnings (P/E) of around 18 as high enough, and will be taking profits.
And I reckon income investors won’t rate a forecast 2.6% dividend yield as anything to shout about, not when there are so many bigger ones on the FTSE 100.
But for me, it’s one I’m considering as I have no exposure to this sector. And I think BAE carries less risk than Rolls-Royce right now.
