The BAE (LSE: BA) share price has outperformed the FTSE 100 by 5% since the start of the year. It’s easy to see why. Investors have been buying this international defence group as the outlook for the global economy has deteriorated.
BAE share price in demand
BAE is a relatively stable business. As one of the world’s largest arms and cyber security companies, the group’s primary customers are country governments. These customers want secure supply deals with trustworthy providers. So they turn to giants like BAE, which has the backing of the UK government.
For example, last year the company delivered the flagship HMS Prince of Wales aircraft carrier for the Royal Navy. It also produced its first four Hawk aircraft for the kingdom of Saudi Arabia. And agreements for delivering ships and aircraft to the Canadian and Australian governments continued to move forward.
Defence is also a long-term business with countries buying aircraft and ships on decade-long contracts. This gives the company a stable, predictable, recurring revenue stream, which may help support the BAE share price. The group’s recently-announced £20bn deal to build warships for the Australian Navy, for example, will last for around a decade.
The demand for the company’s services is booming. The organisation announced orders of £18.4bn during 2020. This puts its order backlog at £45.4bn, equivalent to more than two years of sales.
The FTSE 100 business plans to generate free cash flow of £3.5bn-£3.8bn over the next three years. Not only is this forecast hugely positive at a time when so many other companies are struggling to keep the lights on, but it’s also unlikely to change, given the nature of BAE’s business and order backlog.
Undervalued stock
Despite all of the company’s attractive qualities, the stock appears to be undervalued at current levels. It has a price-to-earnings (P/E) ratio of around 11, which suggests investors are sanguine about its outlook. Indeed, the rest of the aerospace sector is trading at a P/E of nearly 16. This discount suggests the stock may offer a margin of safety at current levels.
On top of the group’s attractive valuation, the BAE share price also has an impressive track record of returning cash to shareholders. But the company has suspended its dividend for the time being until the impact of coronavirus on its operations is better understood.
Nevertheless, in the past, the company has supported a yield in the region of 4%. When some form of normality returns, the group’s cash flows should allow the BAE share price to retain its dividend crown.
As such, now may the perfect time to snap up a share of this world-leading defence business at a bargain price. When owned as part of a well-diversified portfolio, the stock could help you grow your financial nest egg and possibly achieve early retirement.
