BAE Systems (LSE:BA.) shares have been an engine of consistent growth this year, climbing 27%. By contrast, the FTSE 100 index has slumped 2.5% since the start of January. Indeed, the rising trajectory of the BAE share price began back in February 2022, when Russia invaded Ukraine.
Europe’s largest defence contractor is well placed to benefit from heightened security concerns as geopolitical tensions continue to rise. Recent developments in the Middle East add to the investment case.
An escalating conflict in Israel and Gaza is likely to increase pressure for BAE’s major government customers to boost their defence budgets further. So, underpinned by strong demand, can anything stop the FTSE 100 stock’s astronomic rise? And should I add it to my portfolio today?
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Here’s my take.
An insecure world
It’s hard to overstate the impact of recent global events when analysing BAE shares. After all, at the heart of the business sits a product portfolio spanning planes, radar, attack missiles, warships, and munitions.
In light of major conflicts in Europe and the Middle East, coupled with concerns about China’s territorial ambitions regarding Taiwan, demand for the firm’s offering has been growing. The defence giant serves governments across the world and its client base is increasingly geographically diversified.
| Market | FY22 sales |
|---|---|
| US | 44% |
| UK | 20% |
| Middle East | 17% |
| Europe | 13% |
| Australia | 4% |
Promising numbers
The stock is currently trading near an all-time high, having more than doubled in value over five years. Not only that, but BAE shares claim Dividend Aristocrat status. At present, the dividend yield is a respectable 2.57%.
Looking ahead, BAE Systems boasts a record £66.2bn order backlog — that’s almost three times annual sales. Plus, the company’s been a rare beacon of hope in Britain’s M&A market ghost town. Its recent £4.4bn takeover of US space technology company Ball Aerospace is one of the largest deals made by a UK company in 2023.
These numbers provide credibility to a potentially compelling investment case. BAE has a wide moat. Combining deep expertise in sophisticated military technology with close links to government clients and high barriers to entry, the competition risks facing this stock are largely confined to a handful of industry titans.
Risks
However promising the share price trajectory, there are several factors that could derail it. First, there’s the subject of valuation. Currently, the stock’s price-to-earnings (P/E) ratio is around 17.5 — that doesn’t look unreasonably expensive, but it’s higher than the five-year average of just under 15.
Moreover, there are risks in the company’s client base. Beyond the boon provided by recent Western defence pacts such as the AUKUS agreement, Saudi Arabia’s an increasingly important customer for the group. The Kingdom provided 32% of BAE’s Air division’s sales during H1 FY23. This is the company’s largest arm.
It’s no secret that Saudi and American perspectives on issues concerning Israel and Palestine differ greatly. Whether the defence contractor can continue to rely on a diverse client base through the ever-changing landscape of international relations is a moot point.
Should I buy?
I’ve previously owned BAE shares and I regret that I don’t still hold those shares today. Overall, despite some challenges, the investment backdrop looks promising. If I had spare cash, I’d re-enter a position now.
