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BAE Systems (LSE:BA.) shares thrive in an uncertain world. With Ukraine’s future tragically hanging in the balance and the Trump Administration calling into question NATO’s Article 5 on collective defence, many investors are flocking to shares in Europe’s largest military contractor.
But after skyrocketing nearly 250% in five years, is the BAE Systems share price still good value? Or is the FTSE 100 aerospace and defence company now an expensive stock to buy as it changes hands near a record high?
Here’s my take.
According to the International Institute for Strategic Studies (IISS), global defence spending exploded last year to an eye-watering $2.46trn. While the international post-war order crumbles, defence contractors have a key role to play in rearmament efforts.
BAE Systems shares are well-positioned to benefit from rising government demand. The company’s core offering is heavy-duty military apparatus, including fighter jets, naval vessels, armoured vehicles, missile launchers, and munitions.
Understandably, ESG-conscious investors will have ethical concerns about investing in a weapons manufacturer. However, in an increasingly insecure environment, I believe that debate is becoming more nuanced. After all, BAE Systems makes a massive contribution to national (and international) security.
Sales breakdown
Digging into the firm’s revenue, four countries emerge as the lifeblood of the business.
| Country | Percentage of FY24 sales |
|---|---|
| United States | 44% |
| United Kingdom | 26% |
| Saudi Arabia | 10% |
| Australia | 4% |
| Other international markets | 16% |
In three of those markets — the UK, Saudi Arabia, and Australia — defence expenditure is expected to rise further. The sticking point’s the crucial US market. Elon Musk and his Department of Government Efficiency (DOGE) are putting the Pentagon’s military budget under the microscope. At first glance, this could be a potential headache for BAE Systems shareholders.
Most of the cuts thus far may be politically inspired, focusing on diversity initiatives and academic research. That said, the share prices of leading US defence stocks, such as Lockheed Martin and Northrop Grumman, have suffered as a consequence.
By contrast, the BAE Systems share price continues to surge, thanks to the group’s more diversified geographic footprint and smaller reliance on US government contracts. Nonetheless, it’s worth watching developments on this front closely.
A premium valuation, with justification
Trading at a price-to-earnings (P/E) ratio above 26, BAE Systems shares certainly aren’t the cheapest FTSE 100 stock. But I think there are solid reasons for the high multiple.
In its FY24 results, the business excelled across a multiple metrics. Some highlights included an £8bn uptick in the order backlog to £77.8bn, operating profit growth of 4% to nearly £2.7bn, and a 10% hike in the dividend per share to 33p. In short, it’s a company in great financial health.
Growth opportunities are abundant too. Advances in artificial intelligence are increasingly shaping the group’s defence strategies and the acquisition of Ball Aerospace last year has strengthened the firm’s capabilities in the space sector.
A downside of this takeover was an increase in net debt from £2.4bn to £6.8bn, which leaves the balance sheet in a weaker position. This increase in leverage is a risk for investors to monitor.
Overall though, I still see good value in the share price today and think it’s worth considering. I’ll continue to be a happy shareholder for the foreseeable future.
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