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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »