BAE Systems shares: why I’d buy today

BAE Systems shares are up nearly 20% in the last few weeks. But Edward Sheldon believes the FTSE 100 defence stock has the potential to keep rising.

| 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.

BAE Systems (LSE: BA) shares have had a good run recently. Since 5 November, when I wrote that the FTSE 100 stock looked very cheap, its share price has surged about 18%.

Looking at the investment case, I think the shares have the potential to keep rising. Here, I’ll explain why I think BAE Systems is a good stock to buy today. 

UK defence spending boom

According to a report from the BBC this morning, the UK government is primed to announce it will spend an extra £4bn per year over the next four years on defence. This would be its largest military investment in 30 years and represent a 10% increase on the existing annual budget of around £40bn. The extra money will be used to modernise the armed forces, with more spent on robots, autonomous systems, and meeting new threats in the domains of space and cyber, according to experts.

I see this development as a real positive for BAE Systems. BAE is a major contractor to the UK Ministry of Defence. Last year, 19% of total sales came from the UK. Given that BAE has been boosting its cybersecurity capabilities in recent years, I think it looks very well-placed to benefit from this extra defence spending.

Joe Biden’s defence plan

It’s worth noting that the UK isn’t the only country looking to modernise its armed forces today. In the US, military modernisation is also a key theme.

Indeed, earlier this year, Joe Biden made it clear that if he is elected as President, he’ll push for continued military modernisation. His goal is to shift investments from “legacy systems that won’t be relevant” to “smart investments in technologies and innovations — including in cyber, space, unmanned systems and artificial intelligence.

We have to focus more on unmanned capacity, cyber and IT, in a very modern world that is changing rapidly,” Biden said in September.

Again, this should benefit BAE Systems. Last year, 43% of group sales came from the US.

I’m bullish on BAE Systems shares

I’ll point out that future government defence spending isn’t the only reason I’m bullish on BAE Systems shares right now. Recently, there have been a few developments that have been very encouraging.

One was BAE’s trading statement on 11 November. Here, the group said demand for its capabilities remains high. It also upgraded its earnings forecast for the year.

Another was a recent research note from JP Morgan, which currently has an ‘overweight’ rating on the FTSE 100 stock. In the note, its analysts wrote that BAE Systems shares are “significantly undervalued.”

A third was a large purchase of stock from BAE’s chairman back in late July (40,546 shares at 493p per share). This suggests the insider – who’s likely to have an information advantage over the rest of us – is confident about the future and expects the stock to rise. Today, the share price is only 3% higher than the price he bought at.

BAE Systems: low valuation and attractive yield

Analysts expect BAE to generate earnings per share of 48.9p next year. That puts the stock on a forward-looking P/E ratio of 10.4. I think that’s a steal. A prospective dividend yield of about 5% adds weight to the investment case.

All things considered, I think BAE Systems is a good stock to buy today.

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.

Edward Sheldon owns shares in 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

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »