The BAE share price has lagged the FTSE 100 by 10% in the last month. Time to load up?

Could BAE Systems plc (LON: BA) offer improved performance versus the FTSE 100 (INDEXFTSE: UKX)?

| 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.

In the last month, the FTSE 100 has experienced a significant decline. In fact, it has dropped by around 5%, with investors becoming increasingly concerned about the prospect of a full-scale global trade war.

During the same time though, the BAE (LSE: BA) share price has dropped by around 15%. Part of this fall is due to the stock going ex-dividend, but even with this factored in, the company has still significantly underperformed the wider index.

Looking ahead, could it offer recovery potential versus the FTSE 100? And does its valuation now suggest that it is worth buying alongside another stock which released an update on Monday and also seems to offer a wide margin of safety?

Improving outlook

The company in question is data platforms specialist D4T4 (LSE: D4T4). It released a trading update that shows its revenue increased by 194% to £19.95m in the first half of the year. This marked a return to a more normal trading cycle after an unusual phasing seen in the prior year. The company’s adjusted profit is due to be in line with expectations, while its strategic partnerships have moved forward during the period.

The company has made progress in global partnerships, with its addressable market increasing in size. It has also moved ahead with a number of strategic initiatives, while improving its international offering.

Looking ahead, D4T4 is expected to report a 12% rise in earnings in the next financial year. This puts the stock on a price-to-earnings growth (PEG) ratio of around 1.4, which suggests that it could be undervalued at the present time. With it seemingly confident about its long-term growth prospects, the stock could deliver capital growth in the coming years.

Changing business

The underperformance of the BAE share price in recent weeks is clearly disappointing. However, the long-term prospects for the business seem to be gradually improving. The defence industry offers stronger growth than it has done for a number of years, with US defence spending now on the rise following a period of cutbacks. As the biggest spender on its military in the world, the US could prove to be a significant catalyst on the company’s growth outlook.

Clearly, tension involving Saudi Arabia has hurt investor sentiment towards BAE, with the Kingdom accounting for one-sixth of its total sales. While there could be further volatility as political risk remains high, it could also prove to be an opportunity to buy a high-quality company on a relatively low valuation.

For example, the stock now has a price-to-earnings (P/E) ratio of around 16. With earnings forecast to grow by around 9% next year, the company appears to have a bright future outlook. And since its dividend yield now stands at around 3.7%, it could deliver strong total returns in the long run. They could be enough to reverse its recent underperformance versus the FTSE 100.

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.

Peter Stephens owns shares of BAE Systems. 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

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »