BAE share price: can it rise again?

The BAE share price is down 12% year-to-date, but it’s a defensive stock with a strong order book and I think it’s undervalued.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 defence giant BAE Systems (LSE:BA) has endured a disappointing 2020 so far. The BAE share price is down around 12% year-to-date.

But when the world is reeling from a pandemic, the economic fallout and geopolitical concerns around the globe, I find it surprising that such a prominent defence company is not thriving. The British multinational defence and aerospace company is the largest defence contractor in Europe. It manufactures armoured vehicles, drones, ships and aircraft and has prominent customers across the globe. Taking a step back to look at the bigger picture, I think BAE Systems will continue to win contracts and grow in the medium-to-longer term. This cements my view that it is a good defensive stock to own in a Stocks and Shares ISA.

While some may have concerns that the mounting global debt could cause governments to slash their defence budgets, I think ongoing international security issues will keep defence budgets intact for the foreseeable future.

Strong financials and healthy order book

BAE has a price-to-earnings ratio (P/E) of 11 and earnings per share are 46p. The board suspended its dividend (with a 4.6% yield) earlier in the Covid-19 outbreak, but plans to reconsider it once the financial outlook is clearer.

I think a P/E of 11 is low for a company with this level of stability, which makes me think investors undervalue it. I imagine many investors will pile back in to this stock once the dividend is reinstated, so it could be sensible to get in early before a surge of buyers pushes the BAE share price back up again.

The firm has a targeted free cash flow generation of £3.5bn to £3.8bn for 2020 to 2022.

Whether during a rally or a market crash, I would buy BAE shares for my long-term investment portfolio.

Wine share price surges

Another stock worth considering is Naked Wines (LSE:WINE). The naked wines share price has surged since the March stock market crash. And while the BAE share price has stumbled along, the WINE share price is up over 67% year-to-date.

Today’s positive results explain this, with news that its revenue soared 81% during the first two months of its financial year ending 2021. This further boosted the Naked Wines share price, which is up another 5% this morning.

WINE has a market cap of £282m. Full-year results for 2020 show continuing operations were slightly ahead of expectations. Revenue of £203m was up 14% year-on-year. Total profit for the period is £8.2m and the balance sheet remains strong with net cash of £55m. Like many companies operating in the current economic uncertainty, WINE opted not to provide full financial guidance until the outlook is clearer. But it said it expects fixed costs of £28m to £30m for the financial year 2021.

While I think the BAE share price is in bargain territory, Naked Wines’ share price could be overvalued at its current level. It has a P/E of 25, which is quite high, although it makes some sense as its online sales have surged during the lockdown, this may not be sustainable once people resume drinking in bars, pubs and restaurants. I would buy BAE shares at any time, but I would wait for a dip on the back of stock market volatility to buy shares in WINE.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »