When trying to decide whether to buy or sell BAE Systems (LSE: BA.) shares, it’s easy to get wrapped up in the big news. The conflict in Iran is a recent one; it helped the share price rise 45% since December. The increase in government defence spending since the Ukraine invasion was another. The share price is up 325% in the last five years partly because of that.
Each new day might bring a ceasefire or a worsening of hostilities, which can cause big swings in the value of the shares of this kind of defence firm.
But companies don’t make good investments from such macroeconomic factors alone. A business is a good one when it provides products or services that people want to spend money on. And by that metric, BAE Systems has had an absolute belter of a few days…
Eye-catching
The most eye-catching news, for my money, was the successful testing of an anti-drone weapon for the Eurofighter Typhoon. The last few years have upended what we know about modern conflicts. One key realisation is that unmanned drones are now a key part of warfare. Developments to counter this technology are key for BAE Systems to stay on the leading edge.
Two other pieces of good news come in the way of new orders for the firm. The US awarded a $146m contract for M776 cannons. The firm also secured a $180m contract from Sweden for an anti-aircraft system. This is yet more evidence that the FTSE 100 defence firm is still producing the kind of state-of-the-art kit that is valued by governments across the globe.
This all comes on the back of the firm announcing in its February full-year results that the order backlog had grown to £83.6bn. To sum up, the orders keep rolling in, and I think the early signs are the backlog will continue growing over the coming months.
Worth it?
As might be clear from the details above, this might not be a company that everyone feels comfortable investing in. BAE Systems produces weaponry designed to be used against other countries and militaries. Many may not wish to make a personal profit from such an endeavour.
There are those who believe that these companies will always exist, however. For investors who are thinking about purchasing BAE Systems, their attention may turn towards the valuation. The shares currently trade at 33 times earnings.
Another way to look at that is as 3p of company earnings for each £1 invested. That’s quite low compared to the FTSE 100 average of around 6p and some of the cheaper Footsie stocks getting 15p-20p. In other words, there is an expectation of growth in the price an investor pays for a share in BAE Systems.
Personally? I think the price will be justified and the recent announcements are evidence of that. I think the stock is worth considering.
