BAE Systems (LE: BA) shares keep rocketing, smashing through fresh all-time highs over recent months. The share price is up 52% since the turn of the year. The stock is the fourth biggest winner across the entire FTSE 100.
Such great performance is simply continuing a running trend that has made investors in the defence firm very happy bunnies. Anyone with a £10,000 stake at the beginning of 2022 has seen it shoot up to £31,854.
Lessons, lessons
An obvious cause for this growth has been the seismic shift in geopolitics. Three years ago seems like a lifetime away given the awful events that have unfolded in the Middle East, Eastern Europe and now, seemingly, the Indian subcontinent too.
In one respect, this is a valuable lesson for any investor. Firms are not just a number on an income statement. Geopolitics and macroeconomic factors matter. BAE shares were changing hands for 1,042p in late 2023 as governments starting talking up their response to growing threats. Anyone who saw this was more than just sabre rattling could have seen a 68% increase.
Is there more opportunity for this share price to rise? I think so.
While defence ministers across the world keep speaking of raising spending, few are yet clear of the 2% of GDP barrier. Donald Trump is asking for 5% from NATO countries, remember. And Germany has already suggested it will be aiming for that mark.
BAE Systems is Europe’s largest defence contractor and sells world-leading technology and equipment. Sales of fighter jets, submarines and frigates have already driven a 14% increase in revenue for 2024 and a project 7-9% increase in 2025 too.
I’d expect more from this stock if and when governments get spending.
Is it a buy to consider?
As for downsides, it’s hard to ignore that Britain isn’t the easiest place to build stuff these days. Business energy is more expensive than many other countries on the planet. Wages are a major cost. Regulation is often an issue too.
BAE manufactures from 50 sites across the UK with 35,000 employees including notably its shipyard in Barrow-in Furness. On some metrics, it’s Britain’s largest manufacturer. Not just of defence, but of anything! This wil make it hard to compete with manufacturers with cheaper energy or less regulation.
On valuation, the shares trade at 27 times earnings and 24 times forward earnings. At those figures, close to double the FTSE 100 average, investors seem to be expecting a lot of further growth from the shares. That could spell trouble if it doesn’t materialise.
All in all though, the good outweighs the bad for me. Even with the recent share prices rises putting the valuation at quite heady levels, I think this is a stock for investors to consider.
