BAE Systems (LSE:BA.) The shares have been a constant growth engine this year, rising 27%. On the contrary, the FTSE 100 The index has fallen 2.5% since the beginning of January. In fact, the upward trajectory of BAE’s share price began in February 2022, when Russia invaded Ukraine.
Europe’s largest defense contractor is well positioned to benefit from growing security concerns as geopolitical tensions continue to rise. Recent events in the Middle East add to the investment case.
An escalation of the conflict in Israel and Gaza is likely to increase pressure on BAE’s major government clients to further increase their defense budgets. So, backed by strong demand, can anything stop the astronomical rise in FTSE 100 shares? And should I add it to my portfolio today?
Here is my opinion.
An insecure world
It’s hard to overstate the impact of recent global events when analyzing BAE stock. After all, at the heart of the business is a product portfolio spanning aircraft, radars, attack missiles, warships and munitions.
In light of major conflicts in Europe and the Middle East, along with concerns over China’s territorial ambitions over Taiwan, demand for the company’s offering has been growing. The defense giant serves governments around the world and its customer base is increasingly geographically diversified.
| Market | FY22 Sales |
|---|---|
| US | 44% |
| United Kingdom | twenty% |
| middle East | 17% |
| Europe | 13% |
| Australia | 4% |
Promising numbers
The stock is currently trading near an all-time high and has more than doubled in value in five years. Not only that, but BAE stock claims Dividend Aristocrat status. Currently, the dividend yield is a respectable 2.57%.
Looking ahead, BAE Systems has a record order book of £66.2 billion, almost three times annual sales. Furthermore, the company has been a rare ray of hope in the ghost town of the British M&A market. Its recent £4.4bn acquisition of US space technology company Ball Aerospace is one of the largest deals made by a UK company in 2023.
These figures add credibility to a potentially compelling investment case. BAE has a wide moat. By combining deep expertise in sophisticated military technology with close ties to government customers and high barriers to entry, the competitive risks this stock faces are largely limited to a handful of industry titans.
Risks
As promising as the share price trajectory is, there are several factors that could derail it. First, there is the issue of valuation. Currently, the stock’s price-to-earnings (P/E) ratio is around 17.5; That doesn’t seem overly expensive, but it’s higher than the five-year average of just under 15.
Additionally, there are risks to the company’s customer base. Beyond the blessing provided by recent Western defense pacts such as the AUKUS deal, Saudi Arabia is an increasingly important customer for the group. The Kingdom provided 32% of sales for BAE’s Air division during the first half of FY23. This is the largest arm of the company.
It is no secret that Saudi and American perspectives on issues relating to Israel and Palestine differ greatly. It is a moot question whether the defense contractor can continue to rely on a diverse customer base in the ever-changing landscape of international relations.
I should buy?
I previously owned BAE shares and regret that I still don’t own them today. Overall, despite some challenges, the investment context looks promising. If I had extra money, I would re-enter a position now.
