The BAE Systems (LSE: BA.) share price is up around four-fold in the last five years. The surge, which isn’t even including dividends, has come on the back of a drastically different global outlook. The world is sadly a less peaceful place, and therefore defence spending is on the rise.
What does the future have in store? Are overflowing tensions going to spur more growth in defence stocks? Or are we at the moment of peak hysteria? Are BAE Systems shares overvalued and perhaps in bubble territory? Personally, I think the former. And I believe a share price of £30 may not be that far away.
At the heart
The concept of governments increasing defence spending isn’t exactly a new one, at this point. But I think its impact is understated.
Take the UK, for example (BAE Systems is its largest military contractor). In 2018, the UK spent 1.92% of GDP on defence, its lowest figure in at least 50 years. The figure has been creeping up since then towards a target of 3%. Sounds like small change? It’s actually a 60% increase in spending. Not that this is a historic high — the 5.5% of GDP spent in 1984 is nearly three times more spending.
These small percentages represent big money in relative terms. And with countries around the globe shifting into Cold War levels of money spent on their militaries, this could have a huge impact on the sales and earnings of BAE Systems.
Britain might not be the ‘workshop of the world’ any more, but we remain world-class in manufacturing in at least one area – defence products like fighter jets or state-of-the-art naval ships – and BAE Systems is at the heart of that.
Predictions
It’s worth pointing out at this stage that these are unfortunate developments. No one wants more conflict. But increased spending on weaponry is not so much about war as deterring it. The US Secretary of War calls it, “peace through strength”. The best defence spending, as I’ve heard it said, is wasted.
I suspect that even if we see hostilities dampen in the years to come, government spending will ramp up regardless. The cat is out of the bag now, with regards to the aggression of certain world leaders.
That’s not to say this is a risk-free stock. My primary concern issues when making things in this country. Whether it’s world-leading energy prices or a high tax burden, the conditions may not be ripe for more profitable manufacturing. BAE Systems has handled this well so far, but might not forever.
As far as the share price goes, one analyst has a £25 price target on the stock. A 33.6% return over the next 12 months sounds pretty enticing, but I’ll go one better than that. I predict the BAE Systems share price will reach £30 in 2029 or sooner. As such, I think it’s a stock for investors to consider too.
