The BAE (LSE:BA.) share price is something of an anomaly on the FTSE 100 in recent years. And that’s because it’s had some serious momentum behind it. The stock has gained 20% over 12 months and 67% over two years.
Momentum can be an important factor to consider when investing, as it can mean that an undervalued stock will actualise its intrinsic value more quickly. So, is the recent correction an opportunity for investors, or the end of BAE’s momentum?
What’s behind the fall?
Last week, BAE announced it would be spending $5.55bn (£4.35bn) on the aerospace division of the US packaging giant Ball Corporation. The stock dipped. It’s now down around 5% since the announcement was made having recovered slightly over the past five days.
The takeover commentary has been largely positive. Ball Aerospace is expected to make an immediate and positive impact on profit generation. The business should generate EBITDA of $310m at an EBITDA margin of 14%. That’s in line with BAE’s forecast own EBIT margins of 12%.
The acquisition values Ball Aerospace at approximately 13 times its projected 2024 operational earnings, and will deepen BAE’s relations with NASA. The valuation puts it at a discount to BAE, which trades around 14 times 2024’s earnings.
Valuation
Valuation is the critical component when investing. BAE trades at 15.5 times earnings on a trailing 12-month basis, and around 14 times earnings on a forward basis. This puts it at a significant discount to the industrials sector at 19.6 (TTM) and 20 (forward).
When compared, BAE’s trailing 12-month valuation appears particularly attractive, especially in contrast to Raytheon’s higher ratio of 22.7 times, while sitting slightly cheaper than Lockheed Martin‘s 16.4. A similar trend is evident in the enterprise value-to-EBITDA ratios, with BAE at 12.2 times, Raytheon at 13.1 times, and Lockheed Martin at 12.4 times.
Significantly, when considering future projections, BAE’s forward P/E ratio for 2023 drops to around 14. This means it appears relatively cheap when compared to Lockheed’s 16.6 and Raytheon’s 22.2. This suggests it’s a potentially more cost-effective investment opportunity than these peers.
Momentum over?
Investing in stocks with strong momentum can be dangerous due to the inherent risk of market reversals and abrupt shifts in sentiment. While these stocks might appear to be on an upward trajectory driven by positive price trends and widespread enthusiasm, this momentum can sometimes outpace the actual fundamentals of the company.
However, it appears that BAE’s fundamentals still suggest the share price should be higher. The recent dip was likely a reflection of the risk-off sentiment we’re seeing in markets, rather than a push back against BAE’s valuations.
BAE, as a business, is certainly not suffering from a momentum shortfall either. It recently announced that it had a record order book. Moreover, analysts believe that, even if Russia’s war in Ukraine were to finish today, the defence contractor would still experience a positive tangible impact for a decade to come.
As such, it continues to look like an attractive investment proposition. And that dip in the share price may actually offer an enticing entry point for prudent investors. At 989p, I’m looking to catch BAE on the way up.
