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The BAE share price is flying and I think it could go higher. Here’s why

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The FTSE 100 has seen higher volatility than usual over the past month. This has been due to inflation fears, issues with the delta variant and chatter around interest rates. Although this has been negative for some stocks, one company that has seen its share price rally during this period is BAE Systems (LSE:BA). With the BAE share price up over 10% in the past month, could it be a company worth monitoring?

Looking at recent results

BAE systems is one of the largest defence companies in the world. It spans various divisions, including air and land. However, the company also works on cyber security and future technologies in the ever-evolving world of attack.

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The half-year results that were released last week were impressive. When comparing the results to the same period in 2020, EBIT was up 21%. Order intake of £10.6bn was ahead of expectations with good figures across key segments. Maritime sales showed the largest growth of 10%. This helps as the sector has one of the highest profit margins of 37%. 

Another point from the report that I saw as positive (and that I think boosted the BAE share price) was guidance on future free cash flow. It’s on track in 2021 to exceed £3bn, with expectations of hitting in excess of £4bn during 2021-2023. Free cash flow is the life blood of any company, so to see strong figures is a big plus for me.

One area of concern I do have is the outlook with UK defence spending. The company noted increased spending over the next four years here in the UK with strong demand. However, I do have concerns that the government might cut back in this area as part of a broader fiscal diet following Covid-19. In order to help balance the books in some way, I think key departments such as the MoD will see spending cuts that will be passed on to companies such as BAE. 

Room for the BAE share price to move higher

The share price received a boost following the release of the results. Yet at 574p, it’s still well below the level seen last year of 668p before the pandemic hit. If the company is delivering better results than last year, with a positive outlook, I think these levels could be tested again.

This would offer me around a 17% return if I bought some shares now. The risk/reward balance looks positive in my opinion. However, even if we don’t see an uplift in the BAE share price, there is another benefit I could get by owning some shares. 

The dividend yield stands at 4.15%, easily above the FTSE 100 average. So this allows me to pick up a good level of income from dividends as I wait for the share price to (hopefully) move back above 600p.

My view could be wrong, with reduced defence spending and ESG investors shunning an arms company leading the shares to fall. Yet on balance, I’m happy to take those risks and am looking to buy.

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jonathansmith1 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.

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