One of the best-performing FTSE 100 stocks from last month was BAE Systems (LSE:BA.). Thanks to factors including major contract wins and rising geopolitical risks, the BAE share price surged 17% during the month, pushing the stock to fresh 52-week highs. Here’s what happened and where things could go from here.
Reasons for the spike
One catalyst appears to be a £10bn warship contract with Norway selecting the UK for supply of Type 26 frigates. That deal was highlighted as the biggest ever warship export deal by value. Although the exact financial benefit for BAE is difficult to determine at this time, analysts still consider it a major win for the company.
Deliveries are expected from 2030, so this is a deal that can provide revenue for the business for many years to come. Such large, visible wins boost investor confidence in backlog, revenue visibility, and strategic positioning. Therefore, it’s not surprising that the share price rallied on this news.
The stock also benefitted from banks and brokers upgrading their target price. For example, in the middle of September, the team and Deutsche Bank bumped up the 12-month forecast to 2,220p. For reference, the current share price is 2,023p. The team said “the environment is buoyant for new orders, and the longer-term pipeline was bolstered by programme announcements”.
Finally, rising geopolitical risks can’t be ignored. European governments, NATO allies, and the UK are under pressure to boost their defence budgets. This factor is benefitting major Western defence contractors, with BAE being well placed to gain financially as a result.
Direction from here
It’s clear that the company has strong momentum right now. In the coming months, if we receive further announcements about defence spending from governments, it could help push the share price higher still.
Additionally, I believe some investors would consider buying the stock as a defensive measure in the event of a stock market correction. This is because it can be seen as a relatively stable company that’ll do well even if the UK economy underperforms.
Especially on a short-term time horizon, I struggle to see the world becoming a safer place. Therefore, I feel it’s unlikely that the stock will experience a sharp decline due to lower demand.
However, concerns do remain. To begin with, some will feel uncomfortable investing in a stock related to war. I’m in this boat, and I know others are the same. Aside from this, the business is very reliant on government policies. Defence spending is ultimately subject to political decision-making and budgetary constraints. A change in government or shifting priorities could dampen growth.
When I pull it all together, I do feel it’s a stock for investors to consider, based on momentum from September spilling over. However, it’s a sensitive stock that isn’t for everyone.
