BAE Systems’ (LSE: BA.) shares have been on a tear, surging 37% in just three months. For long-term investors, that’s a welcome boost, especially after a quieter 2023. But after such a sharp rise, is it time to take profits, or could the rally continue?
A top FTSE 100 defensive stock
BAE has been a big winner from rising global military spending. The FTSE 100 defence giant now has a record £77.8bn order backlog, fuelled by a string of major deals.
2024 results, published on 19 February, were solid, with profits before interest and tax topping £3bn for the first time, and sales set to surpass £30bn in 2025. The long-term outlook also looks strong, with earnings forecast to grow 8.4% annually until 2028.
Will Europe really spend big?
The shares rocketed after Donald Trump fell out with Volodymr Zelensky and Germany’s 19 March decision to exempt defence spending from its debt rules. That should unlock billions in potential funding as Europe realises it can no longer rely on US military might.
The European Commission is planning €800bn defence fund, suggesting a major shift in spending priorities. But are European states really that committed? France, Italy and Spain have complained that they’d rather use grants than loans, to avoid increasing their debt loads.
There’s also political uncertainty, with talk of a shift away from US-made weapons. The big question is, can European manufacturers like BAE really scale up fast enough to fill the gap? And if they do, will Trump retaliate by cutting non-US weapons procurement, which could hit BAE.
While the Ukraine conflict has been a key driver of defence spending, any unexpected peace deal (even a ropey one) could see European budgets quietly redirected elsewhere.
Is the growth star good value?
Despite its recent surge, BAE Systems shares are only up 17% over the past year, though they’ve soared 200% over five (plus dividends on top).
At 23 times earnings, the valuation isn’t exactly cheap, though it’s more reasonable than rival Rolls-Royce, which now trades at around 43 times.
The 15 analysts covering BAE Systems have a median price target of 1,664p, implying a 6% upside from today’s levels. That’s not exactly a screaming buy signal. Of course, forecasts can’t be relied upon, while many of these will have been made before recent shift on military spending.
Given the recent BAE Systems share price spike, some investors may be considering taking a profit and looking for other recovery opportunities.
I hold BAE Systems shares and plan to keep them for the long run. I feel investors should consider doing likewise. The company is a powerhouse in European defence, with strong growth prospects. But after the recent jump, I’d tread carefully around buying more.
Could the shares soar even higher? Absolutely. But there’s also a chance of a pullback. For me, BAE’s a brilliant long-term buy-and-hold stock that investors should consider. But right now, it might be wise to proceed with caution.
