The BAE share price has outperformed the FTSE 100 in 2020

The BAE share price has held steadily ahead of the FTSE 100 in 2020, but only just. Here’s why I see a much better 2021, and why I’d buy.

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BAE Systems (LSE: BA) has outperformed the FTSE 100 in 2020. At least, as I write these words on 29 December, it has, and only by a little. The BAE share price is down 10%, while the Footsie has lost another couple of points to fall 12% in the year.

It’s possible those market positions could reverse in the short time remaining before the London Stock Exchange closes for New Year. I’d rate it unlikely, mind. And it really doesn’t matter anyway. In fact, the performances of individual stocks in 2020 doesn’t really mean much at all for investors heading into 2021. Well, saying that, they matter in one way. Weak performances in 2020 have, in my view, left us with some undervalued shares to buy as we head into the new year. And I reckon BAE is one of them.

The BAE share price had been buoyant before the pandemic struck, and that helped to cushion it a little in the early months. But by November, BAE shares were down 30% on the year, below the index. Since then, we’ve seen an impressive recovery. But why did investors turn away from the company?

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BAE share price contagion

Some of it must surely be down to fall-out from the troubles at Rolls-Royce. Shares in Rolls have plummeted in 2020, as the near-cessation of air travel has hit the aerospace industry. But Rolls is heavily dependent on civilian aviation, getting its profits from maintenance and repair contracts for its engines.

BAE isn’t in the same situation, and recorded only a modest fall in underlying profits at the 2020 halfway stage. Net debt did grow a little, but the firm’s order intake improved too. At 20 June, BAE had an order backlog of £46.1bn, maintaining steady consistency. Despite what I saw as an encouraging update, those interim figures did nothing to prevent the upcoming slide in the BAE share price. But it did, in my opinion, provide a terrific buying opportunity.

Will the market’s fears prove well founded for the second half? Judging by the company’s November trading update, it doesn’t look that way. Chief executive Charles Woodburn said: “We have continued to deliver a resilient performance in line with our expectations for a strong second half.”

Growing order book

The company reiterated its full-year guidance from the first-half update. And speaking of high demand, BAE said it expected order intake to exceed its pre-Covid planning for the year. That reinforces my view the BAE share price weakness of 2020 has been an aberration.

Though we’ll surely be facing tough economic times for a few years, defence spending remains upbeat. Germany has approved the purchase of 38 new Typhoon aircraft. And in the US, BAE says its “portfolio remains well aligned to customer priorities and growth areas, which we expect to continue under the next administration.

With a long-term record of cash generation and dividends, BAE is firmly on my buy list for 2021. Full-year results are due on 25 February, and I can see good figures giving the BAE share price a boost.

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Alan Oscroft 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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