With a market-cap of £30bn, BAE (LSE:BA.) sits comfortably in the FTSE 100 index. Over the past year, the lead index has risen by 3.8%. By contrast, the BAE share price is up 30%. This outperformance is impressive, but I don’t think it’s over yet. Here are several reasons why I feel the stock could have further gains on the horizon.
Elevated global threats
In light of the war in Ukraine that began last year, defence spending is back on the agenda for many governments. Or for those that have heavily donated military aid to the country, there’s a need to restock. Given that two of the biggest markets for BAE are the US and the UK, it’ll likely continue to see demand from this area over the coming year and beyond.
As a result, the higher revenue should be noted in trading updates, helping to boost the share price.
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Ahead of the game on AI
In the 2022 annual report, the business flagged up the largest areas for the firm. Even though Air and Maritime are the biggest, Cyber and Intelligence now accounts for 9% of the total business.
Given the advancement in artificial intelligence (AI) in recent months, the need to be up-to-speed and protected against the threats is very important. As a result, I’d expect this division to see much higher revenue over the coming year.
Robust during a potential crash
If we do see a stock market crash, BAE could outperform the broader FTSE 100 due to the nature of the business.
Within the index there are stocks related to the property, luxury goods and high street retailers. These are likely to be more negatively impacted from a crash than BAE. Due to the type of customers it services and the necessity of goods provided, the BAE share price should hold value.
As a note, this doesn’t mean the defensive stock won’t fall in value. Yet when comparing the size of a potential fall against other companies, it should be smaller.
Diversified revenue streams
The FTSE 100 is made up of global businesses, but many have a strong dependency on the UK economy. This isn’t really the case for BAE, with only 20% of 2022 sales coming from Britain.
Given that the UK is struggling with high inflation and low growth, companies with large exposure to this market could find it tricky to do well this year. Yet for BAE, it should be able to make up any lost ground by the revenue streams from everywhere from Saudi Arabia to the United States.
Mindful of risks
Despite all the positives, any investor needs to be conscious of the risks. For BAE, it lacks the ESG popularity, given the ties to war and killing. This means that some investors and funds simply won’t buy the stock. Inflationary pressures is another problem, with production costs being pushed higher.
On balance, I feel there are many reasons to believe that BAE shares can do well against the FTSE 100 benchmark this year. Investors should consider this for inclusion on their own portfolios.
