BAE Systems (LSE: BA.) shares have risen over 8% since the defence giant delivered its excellent half-year report on 2 August. This brings the one-year share price return to 26.5%.
Yet I reckon this FTSE 100 stock remains extremely good value. Here’s why.
Exceptional results
BAE makes submarines, warships, fighter jets, combat vehicles, ammunitions and other military equipment. It also has a large cybersecurity division and a burgeoning space business.
Indeed, there are few defence companies that can match BAE’s breadth of capabilities. And chief executive Charles Woodburn says it is this “strong presence across all theatres of warfare” that is driving remarkably strong growth.
Here’s some of the group’s highlights from the first half of 2023:
- Sales increased by 11% year on year to £12bn;
- Order intake of £21.1bn;
- Order backlog jumped to a record £66.2bn;
- Underlying earnings per share increased by 17% to 29.6p.
These are impressive numbers, especially that massive order backlog, which is being fuelled by the ongoing conflict in Ukraine and wider geopolitical tensions.
Consequently, management has upgraded its full-year guidance across the board. It said it now expects around £1.8bn in free cash flow, which is £600m higher than previously forecast.
The interim dividend rose to 11.5p per share, an 11% increase over the first half of 2022.
UK defence spend
As NATO countries continue to support Ukraine, their own reserves of ammunition have started to run low. In particular, the UK’s munitions stockpile has been dwindling.
To help address this, the Ministry of Defence recently placed a £280m order with BAE to supply frontline battlefield munitions. This could increase to over £400m and builds on an existing 15-year agreement.
Therefore, the company is benefitting from governments supplying equipment to Ukraine as well as the need to then replenish arsenals.
Further, the UK government has announced it will prioritise investments in science and technology on home soil, including the use of robotics and laser weapons. Again, the company is well positioned with its unmanned combat vehicles and work on the UK’s laser weapons programme.
However, BAE is far from reliant on the UK defence budget. The UK only makes up a fifth of overall sales, with the rest spread between the US (47%), Saudi Arabia (11%), Australia (4%), Qatar (4%), and other international markets. I find this diversification very attractive.
That said, the company does receive most of its revenue in US dollars. So, for better or worse, it is sensitive to foreign exchange rates.
I’d buy the stock
Today’s geopolitical tensions are arguably the worst since the Cold War. Unfortunately, I don’t see an end to these any time soon. So I think global defense budgets will continue to increase, meaning BAE is well positioned to keep growing.
The shares currently trade at a reasonable 16 times earnings. Meanwhile, the record order book means the business is in an extremely healthy long-term position. The dividend is well covered and the firm has approved a further share buyback programme of up to £1.5bn.
Finally, of the 19 brokers covering the stock, 15 currently have it as a ‘strong buy’ or ‘buy’. This consensus could quickly reverse, of course, but I nevertheless find it encouraging.
If I didn’t already own the stock, I’d open a position today at £10.
