BAE Systems (LSE: BA.) shares are down 22% since 30 September. Around a fifth of the firm’s market cap has been wiped out in just a couple of months. The steep decline occurred all while the FTSE 100 has been soaring to new record highs. The fall has pushed the dividend yield higher, made the valuation cheaper and got many an investor wondering whether this is a rare opportunity to buy a once-surging stock at a big discount.
First off: what happened? How did the shares fall by so much, so quickly?
Peace news
The answer is that it’s down to the war in Ukraine with a chance of coming (hopefully) to an end. While the defence manufacturer doesn’t supply arms to either side in that conflict, the threat of hostile actors on the global stage is getting other countries to spend more.
The link can be seen quite clearly by looking at the share price after news on a potential peace deal. When hopes of a Ukraine peace deal were buoyant on 19 November, the BAE Systems share price lost around 4.5% in value in a single day.
This kind of short-term profit-taking is not what we do here at The Motley Fool. The real money in investing is in the long run, finding those companies that can thrive for decades. Even having a couple such gems in a portfolio can supercharge an investor’s returns.
A buy?
Is BAE Systems one of those stocks? I think so. Delve into the company’s product line and you will find state-of-the-art technology and engineering across the board. There’s a reason why the world’s global military hegemon, the United States of America, is BAE Systems’ biggest customer.
The demand for its products was exemplified by the recent deal with Türkiye. For those unaware, Istanbul placed an order for 20 fighter jets, shelling out £8bn in the process. These Eurofighter Typhoons are some of the best planes going and BAE Systems accounts for around 30% of the work involved.
That’s not to say there aren’t risks. The cost and difficulties of manufacturing in this country are myriad. With numerous locations in the UK like the Govan shipyard in Glasgow or its site in Barrow-in-Furness, BAE Systems is having to deal with some of the world’s highest energy costs and a whole load of red tape too.
The firm’s order book is not exactly within its own control either. If we see peace in Ukraine soon (as I’m sure we’re all hoping for) then that could have a knock-on effect of reduced government spending on defence, which would lower revenues and earnings further down the line.
Personally, I think the conflicts of recent years have been a bit of a wake-up call, especially to many Western governments like the UK. I expect defence spending to be as much of a priority in the years and decades to come. I think this is a stock to consider. I also think that, after a 22% fall, this stock could end up looking like something of a bargain.
