BAE Systems (LSE:BA.) remains one of the FTSE 100‘s trailblazers, its share price rising 57% over the past year. Thanks to sustained outperformance in a booming market, the defence giant’s delivered a return almost three times the Footsie average.
The question is, can the company keep rising? One particularly optimistic broker believes so — they think BAE Systems shares will leap 23% over the next 12 months, to £26.
Could the business really surge again? Here are five reasons why it might.
Buoyant market
Like other major defence contractors, BAE Systems has benefitted significantly from rising global arms spending. As a major supplier across North America, Europe and Asia, the company’s captured a huge share of this increased investment.
Few of us welcome the prospect of conflict, but the reality is defence spending should keep growing as the geopolitical landscape shifts. Global arms budgets hit another new high in 2024 of £2.7trn, according to latest Stockholm International Peace Research Institute (SIPRI) research. With Western arsenals still well below Cold War levels, there remains substantial room for further increases.
BAE hasn’t just thrived in this climate. It’s outperformed expectations, and a continuation of this theme should result in further significant price gains. It announced last week that full-year underlying earnings before interest and tax (EBIT) leapt 12% last year, to £2.9bn. A lower rise of 9% to 11% had been expected.
More price drivers
As I say, BAE Systems’ shares have performed brilliantly over the last year. However, gains haven’t been as strong as they could have been, reflecting fears over reduced sales to US customers. The FTSE 100 firm generates 46% of revenue Stateside.
This remains a threat going forwards, though White House foreign policy more recently suggests sales could remain rock solid. I’m talking about recent military action in Venezuela and rising tensions with Iran, and what this suggests for future weapons demand. Rising confidence that the US will remain an important player on the global military stage could give BAE shares a huge shot in the arm.
The fourth and final price driver to consider is more generous cash returns for shareholders. BAE’s balance sheet is robust, and last year it recorded free cash flow above £2.1bn, encouraging it to lift the full-year dividend 10%. More strong dividend increases could follow in 2026, as could a new juicy share buyback programme when the current £1.5bn scheme completes later this year.
What could go wrong?
Yet it’s important to consider how expensive BAE Systems shares are now, and what this could mean for its share price. Its forward price-to-earnings (P/E) ratio is 25.8 times, well above the 10-year average of 14 times.
Why might this be a problem? At best, it could limit further price gains; at worst, BAE’s share price could collapse if its recent red-hot performance begins to cool. Project delivery issues and supply chain problems are a couple of potential banana skins for its operations, which is why not every analyst is as optimistic.
The current average price forecast among City analysts is £21.40. That’s up just 1% from current levels.
But no stock is without risk, and on balance I reckon BAE’s in great shape to keep on rising. Despite its high price, I think it’s a top share to consider.
