As the US stock markets extend an unprecedented rally in dark financial times, the FTSE 100 has been following a similar path. The main UK financial index has seen a 28% rise since the March market crash.
While the index has rallied overall, how this will continue to play out is dividing speculators. The economy has taken an unprecedented hammering in recent months. Unemployment is rising and geopolitical tensions are escalating. This increases the likelihood of another stock market crash. However, continued government stimulus and oil prices stabilising boost the prospects of the stock market rally continuing. The European Central Bank pledged an additional €600bn in aid through a bond-buying programme yesterday. Meanwhile, oil prices began picking up as OPEC+ appeared likely to agree to further production cuts.
During periods of international tension, defence becomes a key sector to watch. Arms and defence technology manufacturer BAE Systems (LSE:BA) is one such stock in this sector. Since the 2020 stock market crash, the BAE Systems share price has risen over 20%.
BAE contract wins
The British multinational creates technology solutions for defence, aerospace and security markets. One such example would be its APKWS laser-guided rocket system. This week BAE showed the world how it is adapting and test-firing these rockets from a ground-based weapon system. Traditionally seen in aircraft, this technology will now provide ground forces with the ability to fire laser-guided rockets with precision.
In May, BAE won a £350m contract from the UK Ministry of Defence. It also completed the acquisition of its Airborne Tactical Radios business from Raytheon Technologies Corporation. Then this week it won a contract from Lockheed Martin to provide key autonomy and artificial intelligence capabilities for DARPA’s Squad X programme.
However, it is not all good news. Although the BAE Systems share price looks appealing, as an investment, it poses an ethical dilemma. Anti-war campaigners are currently trying to persuade the Australian War Memorial not to renew its sponsorship arrangement with BAE Systems this month. This is because it generates billions of pounds annually from the Saudi military, which is heavily involved in the war in Yemen and the huge humanitarian catastrophe it has led to.
Financial outlook
The group has a price-to-earnings ratio of 11, earnings per share are 46p and it has a targeted free cash flow generation of £3.5bn-£3.8bn for 2020 to 2022. The board postponed its dividend earlier in the pandemic and will reconsider it once the outlook is clearer.
As a diversified company, BAE has room for growth. It is a leader in the international market for Unmanned Aerial Vehicles (UAVs) and cybersecurity. It has made strategic acquisitions and has a considerable order backlog. Liquidity does not appear to pose a problem, and it has access to a £2bn revolving credit facility.
With the world in chaos, I think government spending on defence is likely to increase. BAE employs 85,800 people in over 40 countries. It is a globally recognised conglomerate with prestigious clients in the Aerospace and Defence sector. While I have my doubts that a stock market rally will continue, I think BAE Systems is a stock worth investing in for the long-term.
